The logos for Facebook Inc., Amazon.com Inc., Netflix Inc. and Google, a unit of Alphabet Inc., sit on smartphone and tablet devices in this arranged photograph in London, U.K., on Monday, Aug. 20, 2018. The NYSE FANG+ Index is an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology and tech-enabled companies. Photographer: Jason Alden/Bloomberg
© Bloomberg

Just as in the world of fashion, styles come and go in markets. But, since the financial crisis, one investing style has reigned supreme: growth. It has soundly eclipsed value investing.

Since equities crawled off the canvas in 2009, an environment of low global interest rates and lacklustre economic growth has led investors to own fast-growing companies.

There has been no better hunting ground than tech. In sharp contrast, those fund managers scouring the beaten down ranks of cheap shares in the hope of them bouncing have lagged well behind.

But this month’s jump in US long-term bond yields has challenged the seemingly ever upward flight path of growth stocks.

A higher 10-year bond yield reduces the value of future cash flows, and while that shift has hit equities in general, the selling has been concentrated among tech shares.

Investors are now naturally asking a set of difficult questions. Is the long winning run for growth finally in trouble and does this spell the end for momentum-chasing strategies? And should portfolios rotate away from tech and buy value?

These conundrums come as two big divergences dominate global equities. The first is that growth has vanquished value as an investing strategy, while the second is the degree to which Wall Street, thanks to the heavy weighting of tech, has also eclipsed other stock markets.

So a pronounced switch out of tech from here would have repercussions for Wall Street, given a hefty rotation towards value in emerging markets and other developed economies is likely to result.

Before you dust off your value investing strategy, it’s worth looking at why the stocks that have trailed are cheap and the risk that they stay so for a while yet.

As a group, value stocks consist of problem companies, such as those with poor balance sheets and ailing business lines.

Then throw in the long list of macro worries weighing down on companies and sectors: trade war escalation, slowing global growth outside the US, emerging market troubles, Brexit and Italy’s budget tussle with the EU.

The beaten-up shares for carmakers and industrials reflect trade war fears and concerns of a slowing global economy. The now uncertain macro backdrop and negative interest rates in Japan and Europe hurts financials, which are a major constituent of value groups.

Among the ranks of systemically important global financial institutions, nearly three-quarters of the 39 Sifi’s have dropped at least 20 per cent from their 12-month peaks.

The poor performance of equities outside the US could suggest we are closer to a recession than many economists think. The counter argument, and one that investors need to assess, is how much brighter the picture might look if some, or most, of these macro risks fade.

There are plenty of stocks that would benefit from a dose of China fiscal stimulus, resolution over Brexit and Italy’s budget.

Andrew Lapthorne at Société Générale says: ‘’If the macro problems are tempered you get a short, sharp rally in the space of a few months,’’ a scenario helped by the fact ‘’value stocks look historically cheap’’ and volatility remains low.

The last time we saw something similar to today was at the peak of the telecoms, media and tech bubble in 2000.

The Fed was raising rates during 1999 and into 2000, driven by a hot economy and rising inflation fears. The ensuing Nasdaq bust triggered a big outperformance in value stocks.

As TMT went south, investors sought companies with good balance sheets and capable of paying dividends and maintaining earnings. Previously unloved value stocks shone.

The scope for rapid readjustment today is highlighted by current portfolio positioning. Owning tech was ranked this week by the latest Bank of America Merrill Lynch survey of global asset managers as the most crowded trade for the ninth straight month. The report also showed that the sector is the highest overweight among investors.

The survey offered a nice snapshot of the investing herd but also a reminder that buying value at this juncture is a big contrarian call. You may be right, but like contrarians in the late 1990s, the risk is that you are early.

For all the buzz over value, the scales still favour momentum and sticking with growth through tech and healthcare.

Late-cycle bull markets are defined by narrowing leadership, replete with corrections and more bouts of volatility. We are seeing the third correction in tech this year after 10 per cent drops for the Nasdaq 100 in February and during March.

And as US tech earnings start in earnest this week, investors will probably be reminded that many of the companies are still running at a much faster pace than the rest of the market.

Chris Watling of Longview Economics reckons the dominance of tech means the relative performance of value and growth will be determined by how tech fares and the 10-year Treasury yield. Yields are near their cycle peak, he reckons, and tech provides the ‘’best source of secular growth’’.

“Markets have fashions and they run deep,’’ he says, adding that value will only truly brighten after the next recession.

michael.mackenzie@ft.com

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