Investors in US equities should favour Value stocks over Momentum stocks, according to Lakos-Bujas Dubravko, US Equity Strategist at J.P.Morgan.
Lakos-Bujas and his team argue that Growth and Momentum are getting crowded and stretched from a historical perspective, and that a Momentum sell-off and Value recovery is already underway. In other words, Value stocks (i.e. buying winners on 12-month forward P/E) will outperform high Momentum stocks (i.e. buying winners on 12-month momentum).
As part of his proof, Lakos-Bujas looks at the recent interplay between investment styles. He notes that the correlation between Momentum and Growth has been decelerating, while the correlation between Momentum and Value has been accelerating: “Typically, when the spread between Value-Momentum correlation and Growth-Momentum correlation narrows, Value tends to outperform Growth.”
See chart 1.
Lakos-Bujas says that seven such turning points are identifiable over the last 30 years – in Jan 1987, Sep 1990, Aug 2000, Sep 2002, Feb 2009, and Jun 2012 – and that, “Value has a tendency of outperforming the market [for up to 12 months afterwards] in every such instance.”
See chart 2.