In their latest Q2 2021 Market Commentary, Pzena discuss inflation, value investing, and the performance of cheap vs expensive stocks across inflationary environments. Here’s an excerpt from the commentary:
Inflation, its effect on the market, and its implications for our portfolios have been frequent topics in recent client conversations. Whether caused by disrupted supply chains, shortages, government spending, or pent up demand from pandemic lock-downs, inflation metrics around the world have been ticking up, and it is impossible to know whether these inflationary forces will be transient or longer lasting.
As bottom-up investors, we do not try to forecast the many moving parts of inflationary pressures from a macro perspective, but rather look at the impact of a multitude of issues, including inflation, on a company-by-company basis. However, to provide some context to the inflation discussion, we studied how value stocks performed during various inflationary environments, and the profitability of businesses in those same environments. In short, we found:
- value performed somewhat better during periods of higher inflation
- inflation ultimately had little impact on long-term corporate profitability, and
- value remains the only alternative in equity and fixed income markets today that offers a double-digit earnings yield.
Conclusion – Stay The Course
This value cycle has been driven by extreme value dispersion between cheap and expensive stocks that was a decade in the making and catalyzed by the attractive earnings growth profile of cheap stocks over the next several quarters. Value doesn’t need inflation to work, but, should inflation pressures persist, historically a higher inflationary regime appears to be a tailwind.
You can read the entire commentary here:
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