The biggest quarterly rally in value stocks is a bearish sign to some of the largest money managers, who say it shows the equity market has relied on companies with the worst finances to fuel its rebound.
Money-losing companies in the MSCI World Value Index with the most debt climbed an average of 38 per cent last quarter, compared with a 20 per cent gain for the MSCI World Index. That pushed value stocks, or those trading at the lowest level relative to their earnings or assets, in the index up 22 per cent, the biggest increase since at least 1995.
Gains will be harder to come by as investors search for profit growth to justify the 41 per cent rally in the MSCI World since March 9, according to James Dunigan of PNC Financial Services Group Inc. Price-to-earnings ratios for value shares shrunk relative to growth stocks in the second quarter, showing increasing skepticism that banks and automakers will boost earnings this year.
“The stocks that participated in the rally from March lows were some of the lower-quality names,” said Dunigan, the chief investment officer at PNC’s wealth-management unit.
