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Value stocks offer a refuge in an inflationary environment.

Value stocks offer a refuge in an inflationary environment.

December was a strong month for value stocks, even though high inflation dampened investors’ hopes for large returns.

Inflation increased 7 percent in November compared to the same time period in 2020. This was an increase of 6.8 percent year over year. Investment Metrics, an analytics and data provider, reports that prices have increased consistently through 2021. According to Investment Metrics all value sub-factors performed better than the market at year’s end. Stocks with a high earnings-to-enterprise value ratio, for example, exceeded the market by 2.4 percentage points. Other value sub-factors like earnings yield, cashflow yield, and sales to price ratio also outperformed markets by at least 2 percentage point.

The market grew by 3.4 percentage points in December, however, most growth sub-factors were outrun. Investment Metrics found that stocks with high earnings and sales growth lag the market by 70 base points and 120 bases points, respectively. At the same time, Decembers large interest rate rise of 6.2 percent (the U.S. 10-year constant maturity rate went from 1.42 percent to 1.52 percent) was accompanied by the strong outperformance of value sub-factors over growth sub-factors. According to our research, the spread between Value and Growth was 2.5 percent in December. This is consistent with our finding that the spread between value-growth and U.S. rates increases more than 5 percent per month. 

Damian Handzy, head, research and applied analytics, Investment Metrics, said Institutional InvestorThe more interest rates rise, the greater the value [stocks] win. Value stocks suffer less from rising interest rates’ discounting effect because growth stocks are dependent on long-term profits. Handzy said that a 2021 study by his company showed that value stocks outperform growth stock’s by 100 basis points for every ten percent increase in interest rates. 

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