Will Market Dynamics Support Value Investing?

Amid high inflation, rate hikes and slowing growth, can value hold through this environment and beyond?  This was the topic of a recently concluded webinar where Christy Mathai, Fund Manager, Equity, Quantum Mutual Fund, shared insights about where value investing is headed.

Demystifying value funds, Christy says, ‘Value as an approach is where we are trying to buy companies which are at a reasonable discount to their fair value or intrinsic value.’

Talking about the markets, Christy said, “If you see how the markets have reacted over one year - the returns across Emerging & Developed markets see a downward trend. So, there is this interest rate induced lower growth because of inflation.

If you were to see the MSCI World Index categories in value and growth, you would see a clear trend where value is catching up versus growth and in India it is even more pronounced.”

When discussing the dynamics that fall in favour of value investing, Christy pointed out, ‘Value really tends to do well during interest rate normalization when the capex cycle and credit cycle is taking off. So, in such periods, when there is a broad-based growth economic recovery, value has typically done well. Growth style of investing does well when there is a commodity deflation.’

He also discussed the importance of good governance, ‘There have been repercussions on some of the banks in U.S. which were currently in news. In an interest rate hike environment, these fragile weak business models are exposed. We developed the Integrity screen to weed out any companies which are shaky in terms of governance. So, in value investing apart from the catalyst that we are looking for, it is extremely important for us to have a view on the management - that they will deliver on what they have promised and there is no major corporate governance issue.’=

Talking about value traps, Christy said, ‘As we go about selecting a stock, we make sure to see that it has a defined catalyst that we are constantly monitoring, and it is within the valuation that is comfortable to us.’

When asked how one can identify value funds, Christy Mathai said, ‘SEBI has put up clear exposure limits for each of value style of funds. Typically, any value style should be ideally cheaper than the index and this characteristic should be consistent across different market cycles. A higher dividend yield, lower PE with respect to the index, lower PEG ratio are characteristic of a value fund. if you can consistently compare it across market cycles it will showcase which is a value fund and which is not.

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