The ASX share market is a dynamic world for investors. Sectors go in and out of fashion, individual companies rise to stardom and fall to the wayside.
Usually, specific groupings of shares sway between being embraced and shunned over the years. For instance, growth shares have held a prominent place in portfolios over the years as interest rates have crept lower and lower.
However, more recently, growth shares — such as tech names — have lost some of their shine in the eyes of investors. In their place, the more matured and less premium valued shares on the ASX have gained heightened focus.
So, why have value shares become more appealing than growth recently?
Image source: Getty Images
Rising rates give ASX value shares a new life
The ultra-low interest rate environment that has dominated the past several years has enticed more investors into growth shares. This could be a result of people being forced to move higher along the risk curve to find their desired return. Simultaneously, lower rates make future profits more attractive — benefitting the more forward-looking investments.
But nothing lasts forever — as the United States Federal Reserve looks to lift interest rates to fend off high inflation. The mere expectation alone has put a dampener on high-flying growth shares. Taking a look at the performance of some high profile ASX growth shares in recent times, we can see this:
- Afterpay Ltd (ASX: APT) down 35% in the last six months
- Xero Limited (ASX: XRO) down 8% in the last six months
- Kogan.com Ltd (ASX: KGN) down 26% in the last six months
Overnight, US Federal Reserve chair Jerome Powell noted he won't refrain from increasing rates more if required. This strong signal from Powell has ASX value shares back on the radar of many investors, given that the Reserve Bank of Australia may follow suit.
How does an investor find a value opportunity?
Value investing is reliant on some basic fundamental analysis. As such, the first critical characteristic of a traditional 'value share' is profitability.
From there, investors will take a closer look at the price-to-earnings ratio (P/E) — a metric that indicates what multiple the market is willing to pay for the company's profits. If the P/E ratio is notably lower than its peers in the given industry then value investors might consider it to be a buying opportunity based on its value.
Often a solid ASX value share will boast a sturdy balance sheet, primed with plenty of cash. The combination of profitability and backup cash means that these shares are capable of paying attractive dividends to investors as well.
