The internal workings of global stock markets are giving a flashing red signal. Cheaply priced stocks have been underperforming richly priced stocks for most of the past 10 years but the predilection for high- flyers has intensified sharply in the last eighteen months.
The phenomenon is particularly noticeable in US and Asian markets, excluding Japan, because of the enormous scale of the Faangs, (Facebook, Apple, Amazon, Netflix, Google) and “Bats” ( Baidu, Alibaba, Tencent, Samsung) that dominate the market capitalisations. On some measures, the gap between unloved value stocks and hot growth ones matches the excesses of the peak of the internet bubble in 2000.
Why is this happening? Not because stock markets are becoming more efficient and the value factor has been competed out; if that were the case, the result would be a trendless “random walk” rather than an increasingly precipitous decline in the relative performance of value stocks.