Market Wrap: Value Bouncing Back (Friday 18 February, 2022)

18th Feb '22 by Ben Hobson

15 comments 4597 reads

When we started the Stockopedia staff investment club two years ago, we included a ‘market review’ as part of our regular meetings. The idea was to look at index direction (to help us rate our own performance), the influence of different factors (like size, quality, value and momentum) and economic and industry trends.

Ultimately, the market wraps are about trying to understand what might influence our performance and how that might guide future stock pitches - and what we buy and sell.

This week, we’re bringing that thinking to the platform in what might become a regular market wrap. Hopefully you’ll find it useful…

A quiet start to 2022

A good place to start is this eye-catching five-year chart of large-cap indices around the world.

The decade-long bull run on the US S&P 500 has been quite something to witness, but valuations in the States are causing concern in places. A recent note by Jeremy Grantham (of US asset manager GMO) talks about the market being in “superbubble” territory (Let the Wild Rumpus Begin). That said, both the S&P and the Nasdaq have come under pressure this week.

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Just as remarkable is how underwhelming the UK’s FTSE 100 has been relative to the US, Europe and Australia over five years. But is that trend changing…?

Well, it’s extremely early days, but the UK blue chip index has performed better on a six-month basis against international peers (see chart below). To an extent, that could be down to two themes we’re hearing a lot about recently.

There has been a shift from growth to value over the past year, in part driven by concern about the impact of rising inflation on growth stock valuations.
The FTSE 100 has a skew to sectors where stocks are A) in ‘value’ territory, and B) potentially well placed to benefit from rising inflation (see below).

In particular, energy and utility companies (which have been cheaply rated for some time) could do well from rising prices. We’ve certainly seen solid gains in oil & gas stocks this year (both in the UK and around the world). Meanwhile, banks will likely benefit from the rising interest rates that will be used to try and control this inflation.

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A note about inflation

Inflation continues to dominate financial…

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Revs8

18th Feb '22

Thanks Ben another good read especially on a slow news day..

Let us hope that value small caps start to take off following their larger cap peers.

I love the Super Bowl market prediction. Who needs macro economics when you can just read the Super Bowl result! LOL.

Rusty2

Ben, a lot of the images are not showing on my screen, just a load of numbers and letters.

I have been having problems with this site for the last 12 hours or so.

HHShah

Ben, There is a lot of gobbledygook in your above report! Clicking the long string of letters & numbers does not result in anything. Is there something that I am missing?

Ben, It's sorted out now. Thanks

Aargh Aitch

I hope this becomes a regular feature, I found it useful on first read through and see it as something to return to, maybe getting more out of it on each read. Whilst we are on the subject of having an index to compare your portfolio against I'd be interested to know if anyone else keeps a sold shares portfolio, in order to (Hopefully) watch your holdings diverge and climb anyway from the ones you gave up on. It's good for the soul when it happens, unfortunately for the last few weeks my sold shares have outperformed my holdings...

DWit199

Do you think it would be helpful to add some sector analysis to the industry trends section of this review?

I keep weekly records of the average Stockopedia momentum score of companies in my investment universe for each of the ten stocko sectors. The line chart is a little muddled but used in conjunction with the individual sector chartlets it is possible to get quite a good feel for the way markets have developed over the past year.

cmpeckham

Well at least the traditional "Super Bowl Indicator" is more optimistic. This one says that if the team from the AFC wins the market will be down for the year, and if the team from the NFC wins the market will be up. This years winners are from the NFC so the market will be up! Fantastic news. This indicator has a success rate of 75% .

snodgrasse

can we all club up and hire a hit man to to take Putin out.

doctor dave

How can you do that and include the timings of the sales??

aflash

make notes on the charts, I put 'Bot' and 'Sold' on the dates

Just put add them to a folio, it will have time and dates, I used to do it but not enough folios now.

PLS1nve5t

19th Feb '22

But he adds volatility to the market - a spread betters dream :-)

Bradley Holland

How does one generate the above sector momentum graphs from stockopedia?

Doug2b

Ben, I have always struggled with the concepts of value and growth. My understanding is that growth stocks are, well, growing and you will tend to have to pay up for growth and value means lower cost stocks relative to earnings, but a more static situation.

My area of struggle is that I have always regarded growth as part of the value equation, perhaps this is GARP, growth at a reasonable price. For many years my primary valuation metric was the debt/cash adjusted Neff total return ratio - i.e. effectively an inverted PEG ratio which included the dividend within the growth number and the resulting output proportionately adjusted for cash or debt. Hence for myself and many other investors I suspect, there is no difference between value and growth, it is a case of identifying attractively priced sustainable growth.

A few years ago, I re-read Phil Towns Rule 1 book on investing. The book claims to have identified the natural progression from Graham's approach, through to Buffett through to Phil's Rule 1. An outrageous claim if ever there was one. The addition of momentum indicators to the reasonably sound value growth approach is disastrous - fine in a raging bull market, but at any other time will lead you to be whipsawed into oblivion.

But the value growth aspects of Phil's book is interesting. Particularly his emphasis on equity build up being of greater importance than earnings growth, for the simple reason that earnings are, for the most part, much more easily manipulated or exaggerated than the balance sheet. So called retained earnings frequently never make it in full, or in anything approaching fullness, to the balance sheet equity line. Hence, why the tangible surplus is so important, the annual growth in tangible equity added to the yield, the sum then expressed as a % of the MCap - this becomes the true earnings yield, invert it and it becomes the true PE ratio.

Regarding the UK market in general. The UK stock market contains several high quality businesses that are extremely under valued at present, based on their current and projected equity build up (+ divi) relative to their MCap. I have no doubt thar the clouds that have hung over the UK economy since 2016, some real, some only perceived, have been the cause of London's relative under performance. The Brexit vote, the Cameron resignation, Theresa May's uncertain leadership, the near disastrous 2017 election and the rise of Labour's hard left, Covid, Boris having lost the plot, rising inflation, Putin's madness - there has been no respite, some are global issues but many have been UK specific.

If I could pick out the one issue that spooked UK investors more than any other, it was the 2017 election, we came within a dozen or so parliamentary seats of a Corbyn/Sturgeon coalition that could still have been in power today.

So, when will Spring arrive for the very under priced UK stocks, often in traditional sectors, that are piling up tangible wealth for their shareholders year after year? Impossible to say, but everything that I have both experienced personally and read historically about the stock market indicates that the market always recognises under priced stocks over time, whatever the backdrop. But, when under priced stocks do go up in price after a very long winter, this tends to happen when you don't expect it and often takes place quite quickly. Those who were not already positioned in under priced stocks tend to miss out on much of the gains as the market takes them by surprise and moves quite quickly. Of course it is never enough in investing just to be right, you must have the capacity both to be right and to sit tight.

20th Feb '22

It's not possible from the data available on the website. I have my own database of weekly data from Stockopedia for my "investment universe" which is defined as companies with a mkt cap >£35m that are included in the All Share, Fledgling or AIM All Share indices, excluding REITs and collective investments. I can then generate the charts from that database. Stocko have all the data but it is not available to users. Stockopedia do publish sector average scores here but the numbers are significantly different from mine and there is no charting facility.

Market Wrap: Value bouncing back (Friday 18 February, 2022)

A quiet start to 2022

A note about inflation

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Ben Hobson

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