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BNP Paribas AM: Biggest moment for value stocks since tech bubble

Value stocks are as cheap as they were in the tech bubble. Investors should now prepare to cash in on the value premium.

Value stocks have been underperforming ‘glamour stocks’ for a while, rendering valuations as cheap as they were in the tech bubble of 2000, while ‘glamour stocks’ are as expensive as back then.

This is the case globally, regionally and across macro-sectors. Prices of value and ‘glamour’ stocks have simply moved by much more than any changes in their fundamental values, in opposite directions. The resulting gap in valuations is known as the value spread. A larger spread signals a larger opportunity for value investors.

Lined up for outperformance

We believe value stocks are lined up for outperformance as both value stocks and ‘glamour’ stocks converge towards their respective fundamental values. A compression of the value spread is now the most likely scenario. That is good news for value investors for the coming years. They can earn a value premium by investing in value stocks and by selling or underweighting ‘glamour’ stocks.

Further explorations of what investors should consider in value investing can be found in our paper Value investing: Capitulation or Opportunity? and in our blog Value stocks – Different definitions can mean significantly different outcomes.

Our next article investigates the expected consequences of a compression in value spreads on the performance of various equity factor styles and their multi-factor combinations.

Read more about value spreads across different markets and macroeconomic sectors.

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