value stocks: Will quality stocks rise again as value investing loses steam?

MUMBAI: Quality stocks have had a poor run as compared to value stocks in the stock market – at home as well as globally. So far in 2021, Nifty500 Value 50 index has trounced the Nifty200 Quality 30 index in terms of absolute returns.

As a cyclical recovery took hold at home and globally from September, investors have rapidly switched to value stocks and made astronomical returns in a short span. The Nifty500 Value 50 index is up 41 per cent from September. By comparison, the Nifty200 Quality 30 index has risen merely 9 per cent.

Yet, after months of underperformance quality stocks are making a comeback. Over the past month, quality stocks are showing signs of life as the Nifty200 Quality 30 index has returned nearly 5 per cent, outperforming the value factor.

“Economically sensitive cyclical stocks have had a very strong run year-to-date. We don’t think their full potential is exhausted, but we do see an opportunity to also turn attention to quality stocks as the cycle’s next beneficiaries,” Blackrock’s Antonio DeSpirito said in a recent blog post.

The world’s largest asset manager with over $8 trillion in managed assets believes quality stocks could become the leader of the next leg of the global equity bull market.

The reason for Blackrock’s change in view rests on its belief that the global economy is now progressing from an early business cycle to mid-business cycle. With easy returns, such as those seen over the past 14 months, difficult to come by and investors increasingly wary of inflation running hot and central banks tightening leash on liquidity, certainty of earnings and low volatility could become a dominant theme.

“We see potential for quality to rerate higher. As the cycle evolves, the market will look ahead to more normalized growth rates, and investors are likely to grow more cautious amid concerns around taxes, inflation and the timing of a Fed policy shift,” DeSpirito said.

While Blackrock’s view is largely centered around the US equity market, it can be easily extended to Dalal Street. Back in November, as major global asset managers started talking up cyclical stocks on announcement of COVID-19 vaccine approval, Indian cyclical stocks started seeing strong inflows from foreign portfolio investors.

If foreign asset managers rotate funds towards more low volatility and quality stocks going ahead, the trend is likely to replicate in India, said money managers. “Beyond the short-term tactical opportunity, we also see a long-term structural case for maintaining a quality bias,” DeSpirito said.

Blackrock said that its analysis showed that quality stocks tended to outperform the broad market in long period and the “only time quality did not maintain its edge was in the early emergence from recession”.

“This period also set the stage for an attractive entry point into an investment style that, from here forward, could lend some portfolio resilience as this unusual, and potentially fast-moving, economic and market cycle unfolds,” DeSpirito said.