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Value stocks are back in vogue amid growing stock market volatility, top banker says

Investors are turning to value stocks again, as they move away from more racy growth options after last week’s stock market correction, according to a leading Middle Eastern banker.

This trend follows central bank plans to tighten monetary policies by raising interest rates and slowing COVID-19 stimulus packages.

According to a recent Financial Times article, the MSCI index of value stocks in Europe rose nearly 5% in the first three weeks of 2022 on a total return basis.

The broad MSCI equity index represents the performance of large and mid caps.

“Whenever there is volatility in stock markets, people are looking for stability. Value stocks provide that element over growth stocks,” said Aziz Nader, vice president of capital markets at FFA Private Bank, in an interview with Arab News.

Expectations of interest rate hikes for the coming year and inflation affect the stability of the stock market and especially growth stocks, he added.

Higher interest rates are considered to have a negative impact on growing companies because they erode the present value of their projected future earnings, unlike value stocks, says Nader.

Investors are now betting on undervalued and more stable stocks. Trade publication Fortune points out that value stocks’ price-to-earnings ratios, the standard measure of affordability, tend to be low, making them relatively cheap.

“A good place to look now to invest in value stocks is Europe,” says Nader.

European companies such as energy leaders BP and Royal Dutch Shell, and financial groups HSBC and Allianz, are among the high-value stocks to have posted significant gains in 2022, the Financial Times report points out.

Additionally, funds holding European financial stocks have attracted $1.4 billion in new client funds so far this year, according to the report, citing Bank of America.

Value stocks were also the most popular investment theme this year among 106 institutional investors informally polled by Bloomberg News in the first half of December. Value stocks are considered companies that are cheaply priced relative to their earnings or book value

Until now, value stocks have lagged behind growth stocks such as technology.

Growth stocks around the world have posted annual returns of 22%, including dividends, over the past five years, compared to 9.8% for value, according to indices compiled by MSCI Inc., according to a Bloomberg report.

However, concerns about the end of central bank support measures for global economies during the pandemic and expectations of higher interest rates to stem inflation are reversing the trend.

According to the Financial Times, fast-growing but more speculative U.S. tech stocks have seen strong selling this year.

This created instability in the markets. According to Market Watch, the Nasdaq Composite entered a correction last Wednesday, registering a drop of at least 10% from its recent peak on November 19. On Friday, the Nasdaq Composite was more than 14% below its November high, while the S&P 500 was down 8.31% from its January 3 high.


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Felix J. Dixon