Here’s a great article at the WSJ which discusses the possibility of a value investing comeback in 2018.

Here’s an except from that article:

A little volatility might be what value stocks need to get their mojo back.

Such stocks–which tend to have slow but steady earnings growth and cheap valuations–vastly underperformed their pricier growth counterparts globally last year, compounding a gap that has persisted since the end of the financial crisis. Just think of the surging shares in sectors such as tech, led by the likes of Facebook Inc. and Tencent Holdings Ltd., compared with relative underperformers such as utilities stocks.

Last summer, Goldman Sachs even questioned whether the markets were witnessing the death of value investing.

But if the recent market swoon world-wide is any indication, value stocks could be poised for a comeback, according to an analysis by Morgan Stanley.

Value stocks have historically tended to outperform growth in high-volatility environments, as investors seek what are perceived as safer and steadier stocks. Morgan Stanley defines high volatility as being when the Cboe Volatility Index–a commonly used measure–rises over 30. The VIX surged 116% on Feb. 5, its biggest one-day gain ever, finishing that day at 37.3, its highest since Aug. 2015.

“We find high-volatility regimes tend to favor a rotation into value,” says Steven Ye, a quantitative analyst at Morgan Stanley in Hong Kong. In previous instances when the VIX rose to what he called extreme levels, as in 1987, 1998, 2008, 2010 and 2015, it has tended to remain elevated for several months.

“It is important to distinguish the current correction as a valuation-driven one, since macro and earnings trends remain positive,” Mr. Ye said. “In such a correction, we would look for value with cash flows and avoid both expensive growth stocks” and bond-like stocks that pay high dividends.

Morgan Stanley’s positive call on value stocks hasn’t fully come to fruition, although the gap between the performance of value and growth stocks appears to be narrowing.

In Asia, an index of value stocks provided by MSCI is roughly unchanged in 2018, compared with a 1.4% gain for a rival growth-stocks index. Last year, growth stocks outperformed value in Asia by 20 percentage points.

A similar trend holds true in the U.S. The Russell 1000 Growth Index is up 2.7% this year, compared with a 1.1% drop for its value counterpart. Growth stocks rose 28% last year, compared with an 11% increase for value stocks.

Moreover, markets have calmed in recent days. Asian stocks rose Thursday after strong overnight gains in the U.S. and Europe. The VIX finished Wednesday at 19.26, around its long-term average.

That comes after several indexes around the world, including Japan’s Nikkei Stock Average, Hong Kong’s Hang Seng Index and the S&P 500 Index in the U.S. all fell into correction territory last week, down at least 10% from a recent high.

You can read the original article at the WSJ here.

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