US economy driving the shift
The shift from growth to value is partly down to concerns over the direction of the US economy with Trump’s tariffs looking likely to lead to lower growth and higher inflation, risking a recession. Investors place a high value on certainty and, as a result, are looking to companies that can deliver even against this challenging backdrop. This has led them to relatively economically insulated sectors such as defence, consumer staples, and utilities. Equally in down or sideways markets, dividend yield is a larger part of total return, with higher dividend payers often overlapping with the value-approach.
Looking closer to home, the UK is benefiting from this style pivot. The UK stock market is dominated by large-cap value names, so the MSCI UK Index has been one of the best performing markets so far this year to the end of April. Also, the UK does not have the same representation from high-growth tech companies that have been the rocket-fuel for US markets in recent years. So, as the valuations of these companies come back down to earth, the MSCI UK Index is already priced more attractively, with a dividend yield of around 3.6%, far higher than the 1.3% offered by the equivalent US index.
Europe and US offer value
Aside from the UK, where many value managers find their natural home, Europe and, perhaps surprisingly, the US also offer a backdrop in which value investors can thrive. Both regions benefit from a wide universe of large, listed companies with established track records, where value managers typically seek to uncover opportunities. While UK-listed companies may tend to offer better dividends, Europe and the US both offer a significantly larger investment universe, giving managers greater choice and the opportunity for diversification.
There are two funds that we particularly like in this space – the Brandes US Value and M&G European Strategic Value funds.