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Cheap stocks regain allure as investors embrace riskier bets Add to ...

Investors in the U.S. and Europe are warming again to a portion of the stock market that they’ve shunned since the financial crisis.

Value shares, those trading at lower multiples to earnings and asset value, have rallied three times as much as growth stocks in the U.S. this year, heading for their biggest outperformance in a decade. Cheap companies are getting expensive: the group’s valuation is the highest since 2009 versus growth, data compiled by Bloomberg show. In Europe, value shares have become the costliest since May.

The change of heart underscores newfound investor daring after years of central-bank efforts to restore confidence in the economy. The Federal Reserve is on the brink of an interest-rate increase after steady job gains, and data in Europe are beating forecasts. Adding to the optimism for value shares - mostly financial firms - is the surge in bond yields on bets that Donald Trump’s presidential win will lead to faster growth and inflation.

“Value stocks are certainly in demand, and they are closing the gap with the so-called growth sector,” said Ken Odeluga, a market analyst at brokerage firm City Index in London. “The move has a risk-on flavour to it - the extent and speed of it suggests investors are trying to get on board and take advantage of improving fundamentals in the U.S. and Europe.”

The MSCI United States Value Index has jumped 9 per cent this year to a record, and the MSCI Europe Value Index has rebounded 16 per cent since its post-Brexit low. While they’re still priced at discounts to their growth counterparts, which have a track record of improving profits even during tough economic times, the rift has been narrowing. Companies in the U.S. value gauge trade at 15.9 times estimated earnings over the next 12 months, half the valuation gap versus growth stocks less than a year ago. In Europe, value shares are 22 per cent cheaper, from 30 per cent in July.

Financial firms have the biggest weightings in the value indexes, while consumer and technology companies dominate their growth counterparts. In both regions, financial shares have led the rebound in recent months as bond yields snapped back from their lows, easing profitability concerns. During that time, growth stocks have suffered, with firms such as Apple Inc. and food giant Nestle SA forecasting disappointing sales. The market rotation that has greeted Mr. Trump’s election has added fuel to the trend.

“Growth stocks had two things in their favour - low bond yields and a track record of delivering positive surprises,” said Ian Conway, a London-based analyst at brokerage firm Avalon. “Both of those things have changed.”

The U.S. economy is forecast to expand 1.5 per cent this year and 2.1 per cent the next, from 2.6 per cent in 2015. For the euro area, economists project annual growth of at least 1.3 per cent through 2018.

To ABN Amro Bank’s Didier Duret, Mr/ Trump’s election comes at a time of economic stability that bodes well for equities. Before the financial crisis, American and European value stocks surged about 50 percentage points more than growth shares in four years, as the economy gathered momentum through 2007.

“The European economy has regained some strength, as well as the U.S., and this political change is happening in an environment where the fundamentals are pretty solid,” Duret, chief investment officer at the bank’s wealth-management unit, said by phone from Amsterdam. He helps oversee 20 billion euros ($21-billion). “It creates heavy sector rotation so we will have overall volatility, but it will abate and come back to normal levels.”

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