With cheap equities threatening to break out after a long period of underperformance, JPMorgan Asset Management says some bargains may be too good to be true.
The so-called value traps within the global value universe are close to an all-time high, according to global strategist Mark Richards.
“The proportion of value stocks that also feature in the lowest quality section of the market is close to a 30-year high,” Richards wrote in a recent note. “The risk of picking a cheap stock that turns out to be a value trap has only been greater during the depths of the global financial crisis.”
While history shows that the concentration of so-called value traps typically increases during recessions, the widespread disruption from technological innovation and globalization has led to their increase this time around, Richards wrote.
“Examples of that disruptive power range from the impact of Internet retailing on traditional bricks and mortar stores, easy price comparison that limits firms’ ability to raise prices, and rising competitive pressures as technology helps to lower barriers to entry,” he said. “A low earnings or book value multiple will not necessarily signal that a company’s share price represents good value.”
A market-neutral version of the U.S. value factor has beaten growth by about a percentage point since Aug. 2, according to data compiled by Bloomberg. Disappointing reaction to some earnings releases at technology companies and a temporary pause in the flattening of the yield curve, which boosted financials, has helped drive the move.
The outperformance is not enough for JPMorgan to warm up to the undervalued section of the global stock market, said Richards. The money manager is sticking to its preference for quality and growth when selecting shares, and is continues to recommend U.S. equities over other regions, he said.
This article was provided by Bloomberg News.