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For years so called value stocks have under-performed high flying growth stocks. Part of this is historical, the best performing stocks since the GFC have been high-growth, high-cost tech stocks; this has instilled a preference for these shares in the minds of investors. However, many high-growth stocks are trading at valuations that are at illogical levels, levels equivalent to what was seen during the 2000 dot com bubble.

After the dot com bubble burst, value stocks, which are large, mature companies trading on lower multiples of earnings and higher dividend yields, outperformed growth stocks for the next decade. In fact, value stocks outperformed all the way until 2011, when markets started to recover from the GFC.

While the valuation gap between value and tech stocks peaked at almost 30 percent in the year 2000, the difference is currently around 20 percent, indicating that the ‘value gap’ potentially has room to grow. However, the return to value is unlikely to come at the moment the gap returns to the 2000 levels, rather it will likely come when we see the next market downturn.

Given that predicting the timing of a market downturn in advance can be extremely difficult, investing in predominantly value stocks can be seen as a defensive strategy. Given that there are increasing worries about market valuations from many investors, this could be a time that they return their money to value stocks.

Australia has largely underperformed global peers since the GFC, with much of our market constituted by value stocks, as opposed to large growth stocks. As a result, a return to value investing could definitely be of benefit to the Australian equities market.

Our large banks and miners fit the mould for a conventional value stock; the trade at reasonable multiples of earnings and high dividend yields. These are the stocks that we believe will outperform high value growth stocks should we see a prolonged market downturn.

At Emerald Equities we provide recommendations on what we believe to be solid investment candidates. We also provide financial data, quantitative modelling, analysts predictions, and all the other information you need to form an investment decision for yourself. Visit us at emeraldequities.com.au or call us on 03 8080 5777 for a chat.