Value investing has historically been a source of significant excess returns. This also holds true for European equities in which the annualised value premium, determined by the price to book ratio, has equalled 2.97% since 1990 through 2023.
European value stocks: attractive long-run returns at affordable prices
More recently, the post-pandemic period has seen a strong performance from European corporates. In the last three years, profit margins have improved by +350 bps and stand at a multi-year high. Value stocks have led this profit resurgence within the European equities and have outperformed growth stocks by 2.2% annually over the last three years. Earning growth in the value cohort hasn’t entirely reflected in price performance, causing value stocks to become increasingly more affordable. As a result, the valuation dispersion between growth and value remains at an extremely high level; with value stocks currently trading at nearly 25% discount diversified approach to value investing incorporating three key design features:
1. Avoiding value traps: Steer clear of firms that have lost their earning potential and focus on profitable, winning firms that are most undervalued.
2. Targeting compensated risks: Focus on risks that are rewarded in order to achieve consistent performance across all market cycles
3. Applying a sustainable approach: Capture significant reduction in carbon footprint relative to conventional value portfolios
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