September was a mixed month for global equities as investors in risk assets grew concerned about the rise in coronavirus cases and the looming US Presidential election. After a stellar run, US tech stocks came off their highs, while UK shares struggled from the middle of the month onwards, after a promising start to September.
Our August Market Barometer shows that growth continues to gain the upper hand over value as an investing style, but there are signs emerging that this could be changing.
While large growth stocks (those valued above £8 billion market cap) posted gains of 1.6% in September, large cap value continued to struggle, losing 2.4% in September. Within that group of value stocks, oil giants BP (BP.), Shell (RDSB), banking group Barclays (BARC) and insurer Legal & General (LGEN) all saw double-digit share price losses in the month. Oil prices have started heading south again as fears grow of a second wave bringing the global economy to a standstill again.
But small-cap growth stocks fell nearly 3%, against a gain of 1.1% for their small-cap value peers. Within the 75-stock cohort of small-cap growth stocks, some posted chunky monthly falls, including dry cleaner Johnson Service Group (JSG), which fell 15% in September, recent stock of the week JD Wetherspoon (JDW), which shed 18% and payment solutions firm Network International (NETW), whose shares dropped 27%.
Small-Cap Value Bounces Back
In contrast, some small-cap value names that had a good September include bookmaker William Hill (WMH), which rose 60% as a takeover battle for the business broke out between Las Vegas casino operator Caesars and US private equity group Apollo. Betting firms have had a difficult year as sporting events have been at the sharp end of lockdown restrictions, but William Hill is in the sights of buyers because it has a foothold in the lucrative US sports betting market.
Among the fallers on the small-cap value list is cinema operator Cineworld (CINE), whose shares fell 35% in a single day (October 5) as it revealed it would have to temporarily close its UK and US screens, which affects 663 cinemas in total.
Looking at the returns in the year so far, large-cap growth is still on top, with a chunky gain of 25% in 2020 versus an 18.6% loss for large-cap value, and a near-25% fall for small-cap value.
But, according to Morningstar fair value estimates, that leaves large-cap growth stocks 29% overvalued, mid-cap growth stocks 14% higher than their fair values, while small-cap growth and large-cap blend stocks are close to being fairly valued.
Large-cap blend stocks – which are a combination of growth and value companies – such as Diageo (DGE) and Reckitt Benckiser (RB.) have proved resilient in share price terms this year and maintained their dividends in a tough year for income. Those looking for the most undervalued stocks, meanwhile, will find small-cap value shares trading more than 20% below their fair values, closely followed by mid- and large-cap value companies.