During his recent interview with The Economic Club of Miami, Rob Arnott explained why this is an opportunity rich environment for value stocks. Here’s an excerpt from the interview:
There are pockets of opportunity out there and the backdrop on all of this is the inflation surge. Inflation is wonderful for value.
If you go back historically and look at decades over the last hundred years, anytime you had inflation above four percent for a decade value beat growth by six to ten percentage points per annum during those decades.
Why should that be?
Very very simple firstly high inflation usually means a higher discount rate. Higher discount rate hurts growth relative to value because you’re… most of the value in owning a growth stock is the distant future. And that distant future becomes less valuable with a high discount rate.
Secondly there is absolutely no such thing as high but stable inflation, it doesn’t exist, which means that if you have elevated and turbulent inflation you have elevated economic uncertainty.
Isn’t it nice if you’re in a period of elevated uncertainty to have a low PE ratio, low price to sales ratio, and so forth. So a foundation of underlying fundamentals that can sustain the value of the assets.
So there’s… this is an opportunity rich environment. It’s just not the opportunities people are mostly looking at.
You can watch the entire discussion here:
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