Deep Value Stocks Are Super Cheap. Why a Recession Isn’t a Worry.

 

 

Think again. Value investing does just fine in recessions.

 

That’s the word from Ben Inker, co-head of asset allocation at GMO, who recently took aim at the long-held view that the value style of investing underperforms when the economy tanks.

 

“A common perception is that value stocks are more cyclical and therefore more vulnerable to economic downturn,” he said in a white paper. “We find that this conventional wisdom is false.”

 

Value is often associated with economically sensitive “cyclical” stocks—companies that follow the trend of the economy, prospering when it does well and struggling when growth falters. 

 

It seems intuitive that cyclical stocks would have a hard time in a downturn. If a recession does materialize, that hurts the businesses whose sales and earnings are more sensitive to changes in economic growth.

 

But Inker looked at the performance of value across a range of recessions from the past 50 years and found no empirical evidence that value stocks consistently underperform during recessions.

 

“Growth companies are every bit as likely to disappoint in a recession as value companies are, and that means the value companies aren’t uniquely vulnerable in recessions, everybody is vulnerable in recessions,” Inker said in an interview.

 

“If we are in a world where a lot of companies are going to be disappointing, that is very likely to be more painful for the growth companies than the value companies because it just hurts more to be a disappointing growth company,” he added. “Value companies have the benefit that nobody expects very much of them.”