Outside the UK, our Strategists continue to prefer US vs Europe equities, where the US remains well
supported by record buybacks and the strong earnings delivery. Q3 results have improved meaningfully
since the start of the season, in both the US and in Europe. US continued to outpace Europe, delivering
an exceptional +27%y/y Q3 EPS growth, the strongest since 2010. Despite noise around trade and macro
weakness, the reporting season was overall relatively upbeat, with greater than typical share of
companies revising guidance higher. Furthermore, sales growth stayed elevated at +6-8% y/y rate in both
the US and Europe, which should ease the pressure on margins to do the heavy lifting.
• Value stocks have outperformed the broad equity market over the past 40-60 years by some 2-4%,
depending on region and metric. • Value stocks have low prices vs earnings, cash flow, dividends
and book value. We define Value as stocks that are in the top 30% by these metrics. • In this
cycle, Value has underperformed in the US, with lower excess returns than before in Europe and APAC. This
year, Value has badly underperformed in all regions. • Current Value weakness is similar to the
1990s, which also saw fast earnings growth, multiple expansion, US buybacks and a tech boom. • Value has a defensive streak, exhibiting a beta of only 0.87 to the market in the US since 1951,
offset by a large “alpha” of 4.2%. • The next decade promises to us lower earnings growth and
multiples in the US, due to high entry points, and thus to us a friendlier environment to Value stocks,
as their alpha should dominate their lower beta. • We advise strategically overweighting Value
globally, focused on high E/P, expecting some 1-2% outperformance of the market.
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