Value stocks are experiencing a significant surge, but this rally differs from historical trends, according to Goldman Sachs. Matthew Ross, a local equity strategist at Goldman Sachs, notes that their basket of ASX-listed value stocks has jumped 49 per cent since July. The December quarter saw a strong gain of 21 per cent, continuing into the new year with a further 7 per cent increase.
Unlike previous value cycles, this one is occurring outside a typical “risk-on” environment. Historically, such cycles have seen the broader ASX 200 gain an average of 22 per cent, whereas it has only risen 2 per cent since the start of the financial year. The current rally is largely driven by commodity-related stocks, particularly gold miners. Ross suggests that if we are entering the early stages of a multi-year commodity cycle, the risk presented by rising rates might not be as severe as investors fear. He believes that commodity stocks can sustain the rally, with the potential for earnings across the resources sector to increase by 10 to 20 per cent at current spot prices.
Ross has identified thirteen non-resources stocks that have underperformed in the rally but are still considered valuable. These include insurers Suncorp, QBE, NIB, and insurance broker AUB. The banking sector is represented by ANZ, Bendigo Bank, and Judo Capital. Goldman Sachs analysts also favour Qantas, Aurizon, Reliance Worldwide, AGL Energy, Super Retail Group, and Challenger. Super Retail Group owns chains including Rebel Sports and Supercheap Auto.
Judo Capital is a specialist lender focused on providing financial solutions to small and medium-sized businesses. Challenger is an Australian annuities provider.
