Oisin O'Leary

Why the bond sell-off is good news for value investors

Oisin O'Leary

Rising bond yields are leading to nascent signs of recovery in Europe’s unloved ‘value’ stocks. This is good news for investors – such as us – with a portfolio tilt towards traditional value sectors like financials.


A picture paints a thousand words, or so goes the saying. So rather than write at length on the regime change we think is looming for European markets, I’ve pulled together some charts which I think do an excellent job of illustrating what we’ve been observing in bond markets recently – and how this is beginning to feed through to  equities.


European value stocks’ performance has historically shown a strong positive correlation to bond yields. With bond yields falling in the years since the Global Financial Crisis, value investing has been out of favour relative to growth investing for almost a decade.

Falling bond yields


2018 has been no different. By the start of September, European growth stocks had outstripped their value counterparts by 9%.


Value underperforming growth 


However, there are signs of a turnaround in the pattern. Since the start of September, European value stocks have begun to outperform growth.

Value outperforming growth 


Why is this? Well, it again appears to be linked to bond yields, which have begun to rise. The US 10 year yield recently moved above the 3% level to a five year high, while European bond yields are also at the top of their recent range.

US bond yeilds 


Will this relative strength in value stocks continue? Will bond yields keep moving higher?

We have seen false alarms before, including earlier this year during February 2018’s ‘Vix-mageddon’ bout of volatility and rising bond yields. But, we think it is a matter of time before value’s history of underperformance unwinds.

The European Income funds are positioned for an inflection in the performance of value. They have significant exposure to value areas such as financials. This sector has also performed well recently, having previously lagged year-to-date.

Financials & value credentials

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Key Risks


Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.




The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, October 5, 2018, 2:30 PM