The massive divergence between growth and value indicates that the turning point has now been reached. In this respect, undervalued but profitable companies with an intact business model should be successful in the market again in the future. Fears of a recession are exaggerated, although it can be assumed that the economy will remain weak for some time.
Value stocks, which in the past were punished and were overshadowed by enormously growing companies, could revive in the near future. This is the opinion of Olgerd Eichler, Lead Portfolio Manager of the MainFirst Top European Ideas Fund and MainFirst Germany Fund. In this respect, yesterday's losers could well be among tomorrow's winners. Because positive developments or little worse than forecasted messages regarding the general economic situation, the trade conflict or the still unsettled Brexit have in its entirety in principle the potential to lend further tail wind to these occasionally scorned values.
Eichler comments on this with a view to the overall economic situation: "We expect the European economy to stagnate for some time, but not a far-reaching recession. In this context, profitable and well-positioned companies should once again be the focus of attention in the market. Hopes of a comeback of value stocks are rising, especially as too much is now being paid for supposedly high-growth companies and the valuation gap between these growth stocks and value is enormous. The counter-movement has already begun, although the market as a whole does not yet fully reflect this development. On the other hand, we expect a relatively poorer development of defensive quality stocks in the coming quarters."
The retrospective strong appreciation of growth stocks, driven first and foremost by fears of recession and high uncertainty, had consequently also left its mark on the MainFirst funds. "Our portfolio of selected stocks, the majority of which come from small and mid caps, was severely adversely affected by these developments. Nevertheless, we are sticking to our investment philosophy and are convinced that the companies in our portfolios with a strong market position and a solid balance sheet will return to a significantly higher valuation in the future," concludes Eichler.
In view of this scenario, it could make sense to swim against the current. After all, supposedly difficult crisis situations also offer good entry opportunities. This applies in particular to those stocks that were sometimes criminally spurned in the past and can now consequently outperform the market.
Author: Olgerd Eichler, fund manager for MainFirst Germany Fund and MainFirst Top European Ideas