Value for money makes a welcome return

Some “expensive defensives” and other highly priced market darlings of recent years have started to lag.

APN Outdoor’s share price has tumbled 35 per cent since it lowered its fiscal 2017 earnings guidance a week ago.

With the Australian sharemarket tracking sideways for the past four weeks, it might seem as though the latest corporate earnings season has been a non-event.

After surging 11 per cent following the sell-off after Britain’s vote to leave the EU, Australia’s benchmark S&P/ASX 200 has been unusually quiet throughout the reporting period.

But the flat trend of the broader market masks the fact that some of the unloved “value” stocks are making a comeback, while some of the “expensive defensives” and other highly priced “market darlings” of recent years have started to lag behind.

It’s a sign that investors are locking in profits in case of a retreat in the overall market, while seeing better opportunities in companies that may be due for a recovery in earnings. Stalwarts like CSL, Transurban, Brambles, AGL and REA Group — long favoured for their reliable earnings and dividends in a world of record low interest rates — have underperformed the S&P/ASX 200 index this month.

At the same time, many of the out-of-favour blue chips like BHP Billiton, Woolworths, Wood­side Petroleum, Lend Lease and Qantas have started to outperform.

“Notwithstanding low volatility, it does seem that value wants to perform,” Deutsche Bank equity strategist Tim Baker wrote in a report. “Value stocks have had a tough couple of years, but value has beaten growth in August so far, with some cheap names running. On the other hand, some high PE stocks have suffered.”

Certainly, market darlings like Domino’s Pizza, Cochlear and JB Hi-Fi have remained strong throughout the earnings season despite results that didn’t shoot the lights out in some cases.

Indeed, the broader market has done well to hold steady, given that the number of recommendation downgrades by analysts have outnumbered upgrades by about two to one.

But in many cases it hasn’t taken much of a disappointment to trigger some nasty sell-offs in high-priced stocks. APN Outdoor was a good case in point. Its share price has tumbled 35 per cent since it lowered its fiscal 2017 earnings guidance a week ago.

BHP on the other hand has added 7 per cent after delivering fiscal 2016 results that were broadly in line with expectations.

Baker says the evidence of a switch from high PE to value stocks is something to keep an eye on. The performance of the market darlings in recent years has been turbocharged by record low rates and, while there could be further cuts in Australian interest rates, global markets could start to fret about a potential rise in bond yields stemming from US interest rate rises, as well as any uncertainty relating to EU and US politics in coming months.

Federal Reserve chair Janet Yellen was expected to firm up expectations of another US interest rate hike in her speech to central bankers in the US last night.

AMP expects shares to trend higher over the next year amid easy global monetary conditions.