Value will return from the dead and the global leading companies will falter eventually, just like they always do, according to the godfather of smart beta, Rob Arnott, founder and chairman of Research Affiliates.
Speaking at ETF Stream’sBeyond Beta Europe Digital event, Arnott (pictured) hit back at continuous speculation that the value factor has had its time having underperformed for over a decade.
In a struggling economy, there is a fear that cheap stocks which are in a headwind have thin profit margins and are more likely to go bankrupt.
“Value is struggling for a whole host of reasons, not least being coronavirus,” Arnott explained. “Coronavirus has created outsized demand for technology just like how my family watches films on Netflix, I order my packages from Amazon and we have this discussion digitally.”
A study by Research Affiliates compared value’s performance and structure in previous market environments to its current state. It found that the factor is not massively impaired, it has just become increasingly cheaper.
Additionally, those companies at the top in terms of market capitalisation end up faltering and struggle to maintain their dominance, according to Arnott. He highlighted how only two or three of the world’s 10 largest companies at the beginning of each decade would remain in that ranking at the end of each 10-year period between 1980 and 2020.
“When markets are in a growth-dominated, momentum-chasing bubble, those top 10 names will come to falter and we are currently in a growth-dominated, momentum-chasing bubble,” Arnott continued. “But these bubbles burst, the only challenge is you do not know when.”
Another concern for investors and a potential bubble discussed is the central banks’ involvement within the ETF market. Several central banks have begun buying bonds ETFs and the Bank of Japan has had a significant involvement within the equity ETF market for many years, so how can one allocate with this in mind?
These central banks know they are blowing asset bubbles, and “when the blowing stops, the bubble bursts”.
He added: “I would suggest this is a time of moderate risk-off investing and to not be greedy by picking up nickels in front of a steamroller.”
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He believes that western Europe is seeing a significant fall in deaths associated with coronavirus and could be approaching herd immunity. This could result in a pull back in stimulus from central banks and mean markets need to search for its fair value.
While the Federal Reserve said it will continue to provide stimulus until 2023, Arnott does not agree this will provide security for another three years, and definitely not if herd immunity becomes even more apparent.
“At some point, the largesse will begin to slow and people will expect it to slow,” he concluded. “Will the physical largesse continue at a multi-trillion annual pace if we are at herd immunity? I do not think so.”
