Does Value Stocks’ July Rebound Mean the Expansion Is About Over?

Historically, value outperformance happens when an economic boom has played out.

Value stocks had a good July. Was that an aberration? Or a portent of a new trend?

Often, a sustained value-stock superiority happens when the economy isn’t roaring, or at least appears to be decelerating. The second quarter’s robust GDP reading is an argument against a near-term slowdown, although worries are mounting that bloated corporate debt or a possible trade war could end the party.

Last month, by the reckoning of S&P Dow Jones Indices Managing Director Jodie Gunzberg, “Value made a comeback.” The large-stock S&P 500 value index was ahead 4.95%, versus its growth counterpart at 3.44%.

The same was true for the mid-cap category, 2.17% to 1.38%. Only with small-caps was growth still ahead, 3.75% to 2.6%, likely due to fear over a trade war—small stocks, whether value or growth, tend to have little international presence.

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There have been times in the past decade of recovery where value has led growth, such as during the 2010-2011 European debt crisis, when the market feared another worldwide recession was imminent, and in 2016, as oil prices tanked, giving rise to talk of another slowdown. But these were brief.

The longest ascendancy of value came from 2002 through 2006, according to Wells Fargo. Then, economic expansion was so-so and tech was on its back from the bursting of the internet bubble. Also, the Federal Reserve was raising rates, usually a growth retardant.

Low price-to-earnings ratios, the hallmark of value stocks, make them more affordable, but they also look stodgy when times are good. Tech stocks, which by definition are growth-oriented, have led the current rally. Some of the slowing of the growth category might be owing to recent troubles at a few tech darlings, like Facebook, down lately because of its entanglement with Russian mischief-makers.

For value, defensive sectors like consumer staples, utilities, and telecom are the longtime traditional players. For the most part, all these were nicely ahead last month, with large-cap segments up around 4%, 2%, and 2%, respectively.

Financials, another value segment, had a good July, with the large-cap ones up around 4.5% in stock price: The thinking goes that higher interest rates will benefit financials.

“Although rates didn’t increase,” in July, S&P Dow Jones’ Gunzberg wrote in a report, “the market could be looking ahead to September when there is a chance for an increase” in short-term rates from the Federal Reserve.

The guiding light for value investors is to buy those stocks when out of favor, and take advantage when they turn around. At some point, these investors will have their day.

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Switzerland’s Largest Pension Fund Trims Equities for Real Estate

Publica has cut some stocks to de-risk, and will also sell some of its bonds as part of a new strategy.

Publica, Switzerland’s largest pension fund, trimmed some of the equity from its investment portfolio and levered up on real estate in July as it continues to de-risk.

The $39.9 billion public sector pension plan cut 2% of its equities in July, reducing its stock portion to 27% from 29%, according to IPE.com. It then added that amount  to its international real estate section, which has now gone to 6% of fund assets from 4%.

Local non-government bonds were also reduced by 2%. That allocation now comprises 8% of the portfolio. Publica said it will put the bond profits in private real estate financing and emerging market debt. The fund also plans to sell non-local public corporate bonds. The money will be invested in private company and infrastructure debt, which will make up 7% of the portfolio over the next three years, when it completes the implementation of a new strategy.

The real estate shift follows a trend in Swiss pension funds, according to Credit Suisse’s Q2 2018 Pensionkassen Index results. Exposure has increased by 44 basis points, and the average Swiss pension plan currently allocates 22.84% to the asset class.

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Plans in the Swiss index gained 0.15% from their real estate investments in the second quarter.

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