Value investing can benefit from low interest rate environment

Jacob Smart, Zenith Investment Analyst

Jacob Smart, Zenith Investment Analyst

The last 20 years have seen global fund managers who favour growth style investing outperform their value counterparts. A key driver of this outperformance has been the falling interest rate environment as growth stocks are more sensitive to interest rate movements. This has seen them benefit more from the recent decline in global interest rates.

However, in its latest sector report – International Shares – Long/Short, Zenith Investment Partners found evidence of value outperforming growth in a low interest rate world and believes a value allocation can be highly beneficial for an investor’s overall portfolio.

“Our research found that where interest rates and bond yields hover near zero, value can outperform growth,” said Jacob Smart, Senior Investment Analyst at Zenith Investment Partners.

“We used Japan as a case study as they have experienced a sustained period of low interest rates with long-term bond yields having remained persistently low – below 2% – over the past two decades.

“The lack of growth and inflation has prompted market participants to revise the prospects of the economy downwards. Despite comprehensive monetary stimulus from the Bank of Japan, economic activity stagnated.

“These financial conditions have seen value outperform growth by 2.9% p.a. over the past two decades, almost the opposite of what has played out in other global markets over the same period,” said Smart.

“While the current market environment has been supportive of growth as an investment style, the Japanese case study shows that value investing can work in a low interest rate environment, an environment that appears on the horizon for global markets.

“As such, Zenith believes that it is crucial for investors to blend value and growth investment styles to gain a balanced portfolio outcome.”

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