Rally in value stocks sends bearish signal
The big quarterly rally in value stocks is a bearish sign to some of the largest money managers, who say it shows that the
equity market has relied on companies with the worst finances to fuel its rebound.
"There was a junk rally, where stocks with the most problems were leaders," said Charles Dautresme, a strategist at Axa Investment Managers, which oversees about $651 billion in Paris. "The biggest of the rally has passed."
Money-losing companies in the MSCI World Value Index with the most debt climbed an average of 38 percent last quarter, compared with a 20 percent overall gain for the MSCI World Index, according to data compiled by Bloomberg.
That pushed value stocks, or those trading at the lowest level relative to their earnings or assets, in the index up 22 percent — the biggest increase since at least 1995.
The World Value index comprises global stocks identified as undervalued by using price to book-value and price to 12-month forward earnings ratios, and dividend yields.
Gains will be harder to come by as investors search for profit growth to justify the 41 percent rally in the MSCI World since March 9, according to James Dunigan of PNC Financial Services Group Inc. Price-to-earnings ratios for value shares shrunk relative to growth stocks in the second quarter, showing increasing skepticism that banks and automakers will boost earnings this year, according to data compiled by Bloomberg.
"The stocks that participated in the rally from March lows were some of the lower-quality names," said Dunigan, the chief investment officer at PNC’s wealth-management unit, which oversees $100 billion in Philadelphia cash loans. "They won’t build the foundation that we will need for a sustained rally from here."
Three of the value gauges’ five best-performing stocks in the second quarter were financial companies — Lincoln National Corp.; Fifth Third Bancorp; and Principal Financial Group Inc., based in Des Moines, Iowa. The fourth-biggest gain was posted by Ford Motor Co., based in Dearborn, Mich., the only major U.S. automaker to avoid bankruptcy.
Lincoln, the Philadelphia-based insurer that has reported two consecutive quarterly losses and is taking $950 million in U.S. aid, surged 157 percent last quarter for the second-best performance in the MSCI value measure.
Fifth Third, the Cincinnati-based lender ordered by regulators in May to raise $1.1 billion after the Feds stress tests, jumped 143 percent. Ford surged 131 percent. The second- largest U.S. automaker posted a record loss in 2008.
"We remain circumspect about stocks that doubled and tripled after being massacred, weren’t expensive and weren’t very beautiful items in the first place," said Roland Lescure, who oversees $119 billion as chief investment officer of Groupama Asset Management in Paris.