Growth rebounds in US and European equities… but value prevails in EMs

Growth investing outperformed broader markets in both the US and European equities over the third quarter of 2021, but value trumped its rival on almost all metrics in the developing world.

That is according to analysis by Investment Metrics, which looked at the most prevalent factors driving equity returns in key markets over the three months from July to September.

The analytics and reporting company broke down regions into the US, Europe, emerging markets (EMs) and Australia, which showed that value underperformed in all areas apart from the emerging world.

This result was achieved by looking at an array of factors across the three-month period and measuring them against the relative performance of the top 50% of stocks of that specific factor compared with the wider market. For example, book-to-price measured periods of performance from a basket of stocks with the highest book-to-price values relative to the total market.

Within the US, the focus was on quality and growth, which outperformed the S&P 500 by 100bps. Value stocks did produce outperformance in September but the single-month return was not enough to reverse the three-month numbers.

The value/growth interaction changed over the analysis period, which Investment Metrics linked to the shifting rates environment, or expectations around rates. The group said the US 10-year rates rose marginally in July and then more significantly in September, which favoured value.

The outperformance of large-cap stocks and low volatility investments meant US equity investors were largely drawn to defensive stocks, which ran counter to the idea that ‘recovery’ plays would prove popular in a post-pandemic environment.

European equities largely mirrored the US equities, with value lagging growth across the whole of the third quarter. UK rates rose in September, which gave value a minor lift but the emphasis remained with growth for the majority of the period.

However, EMs showed the greatest deviation, as value has done well in the emerging world all year long. Quality and volatility measures were mixed in EMs, but momentum proved strong as a sub-factor, which was largely due to the crossover between emerging value and emerging momentum.