Is the ASX value shares party just getting started?

Value shares tend to do comparatively well in higher interest rate environments.

| More on:
A group of people at a party look upwards to the camera as they celebrate the rise of ASX value shares

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX value shares are outperforming growth shares
  • High interest rate outlooks are turning the tide
  • Many investors have not reallocated their portfolios yet

After underperforming growth shares for the better part of 10 years, value shares are shining bright in the new year.

Since the opening bell on 4 January, the S&P/ASX 200 Growth Index is down 7%. Meanwhile, the S&P/ASX 200 Value Index has gone the other way, up 6%.

All together the S&P/ASX 200 Index (ASX: XJO) is down 5% in 2022.

Why are value shares outperforming growth shares?

Much of the shift in investor sentiment has come following the realisation that inflation is running higher than most economists had forecast last year. That's leading to inevitable interest rate rises, which hits growth shares harder, as they're more dependent on future earnings.

The prospect of rising interest rates helped propel the steep losses among tech shares last month. And in turn, it's seen ASX value shares benefit.

In The Australian Financial Review, Perennial Value portfolio manager Stephen Bruce said:

Now that better growth and higher inflation seem to have become entrenched, the rate tightening cycle has finally started. This has meant the de-rating of the expensive parts of the market. How far this continues will be a function of growth, inflation and rates.

Is the ASX value shares party just getting started?

While ASX value shares have well-outpaced growth shares in 2022, what can investors expect going forward?

Dougal Maple-Brown, head of Australian equities at Maple-Brown Abbott, believes there's a long way to go yet:

We've had a pretty good run. Value has underperformed for almost a decade, but the one-year numbers are now looking really good. We think there's still something left in the tank because while the extremes have been hit, there are some stocks out there with a lot of excess still. The valuation dispersion is still very wide even though it's come back a fair bit, so we think there's a long way to go.

Bruce also believes the brighter run for ASX value shares is a long way from over:

Given how historically low rates are and how extreme valuation dispersion in market has become, there could potentially be a long way for this to run yet.

Flows are definitely starting to improve, but there hasn't been any massive shift back towards value yet. I think investors, both retail and institutional, have all become very underweight value over the last number of years. So potentially, there could be a significant reallocation if this rotation continues.

By the numbers

To give you some idea of how leading ASX growth shares have stacked up against value shares, Pointsbet Holdings Ltd (ASX: PBH) – a growth share favourite that gained 1,137% from 20 March 2020 through to 19 February 2022 – is down 28% in the new year.

Fellow growth share, Appen Ltd (ASX: APX) has struggled as well, down 22% so far in 2022.

Then there's leading ASX value share, QBE Insurance Group Ltd (ASX: QBE), which has seen its shares gain 7% year-to-date.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Appen Ltd and Pointsbet Holdings Ltd. The Motley Fool Australia owns and has recommended Appen Ltd. The Motley Fool Australia has recommended Pointsbet Holdings Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Value Investing

A couple makes silly chip moustache faces and take a selfie on their phone.
Value Investing

2 ASX value shares that are must-buys for Australians in November

Price is what you pay. Value is what you get.

Read more »

A young man goes over his finances and investment portfolio at home.
Growth Shares

Why earning 4% to 5% in a term deposit 'isn't that attractive'

The upside is capped on the most risk-less investments.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Value Investing

2 cheap ASX 200 shares down over 30% this fundie just bought

There's still value opportunities in this frothy market.

Read more »

Two excited woman pointing out a bargain opportunity on a laptop.
Value Investing

How to find cheap ASX value shares in the current market

Where is the value in such a hot market?

Read more »

A boy leaps and flaps his arms as he tries to fly with some birds on the shoreline of the beach.
Value Investing

The ASX is soaring to new heights, but Aussie investors can still seize profits

There are still ways to invest prudently when the markets are at record highs...

Read more »

Woman with spyglass looking toward ocean at sunset.
Value Investing

How to find ASX value shares when the market's at an all-time high

Finding value in a frothy market can be a challenge.

Read more »

A young male builder with his arms crossed leans against a brick wall and smiles at the camera as the Brickworks share price climbs today
Value Investing

Looking for value shares? This ASX 200 gem looks like a no-brainer buy to me!

Is this dividend favourite shaping up as an ASX value gem?

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Value Investing

Down 11% this year, is this ASX bargain stock too cheap to ignore?

Does this tick the value investors' checklist?

Read more »