Morgan Stanley sees cycle turning higher for 'value' stocks

Equity strategists at Morgan Stanley sounded a positive note on so-called 'value' stocks, arguing that the economic cycle was shifting into a 'recovery regime' - but there was catch.

Their caveat was that investors needed to differentiate those individual stocks whose business models were not being 'disrupted' and those that were.

In terms of the economic drivers behind the expected outperformance of that first batch of companies, they cited expectations for a V-shaped recovery, decreased political risks in the European Union thanks to the proposed Reconstruction Fund, higher bond yields and a stronger euro.

Indeed, their own quantitative analysts shares their preference for value stocks due to the extremely low valuations now on offer and their historically strong performance during periods of economic recoveries.

During the past 10 years, growth stocks had outperformed value ones by 66% and nearly half of that outperformance had taken place in just the last six months, they highlighted to underscore the decade-long 'value trap'.

"Structural headwinds may ultimately limit the extent of Value outperformance, but we think that cyclical tailwinds are likely to trump structural headwinds in 2H20, and the low valuations of Undisrupted Value suggest the Value vs Growth discount cannot entirely be explained away by structural disruption trends," they explained.

From among UK-listed shares with a positive or neutral disruption score, with 'overweight' or 'neutral' recommendations and whose two-year forward valuations were in the bottom-half of their 10-year range they found: BT Group, British American Tobacco, Sainsbury, Vodafone, Morrison, BAE Systems, Glencore, Tesco, Smiths Group, Pearson, Taylor Wimpey and Barratt Developments.

On the flip-side, stocks with negative disruption scores, who were 'underweight' or 'equal-weight'-rated and whose valuations were in the top-half of their 10-year range, included Ashtead Group, Admiral Group, Intertek, St.James's Place, Compass Group, and GlaxoSmithKline.