Applied philosophy - The value outperformance dilemma

Value has outperformed so far in the current market cycle, as we would have expected based on previous experience. The periods of value outperformance tended to last for 5-7 years before the Global Financial Crisis but have since been shorter. What do our macroeconomic views suggest and can our sector views help us determine the future path of value?
We have typically viewed our value factor as a recovery asset, rallying at the beginning of market cycles. Our US and European factor indices have indeed outperformed their respective benchmarks in this recovery and have even outperformed our growth index since the announcement of successful COVID-19 vaccine trials by Pfizer in early-November 2020. We believe this has been driven by value’s exposure to stocks in so-called cyclical sectors, which tend to be the most sensitive to changes in the economic cycle. We also view value as a short duration asset, which we assume would do relatively well in periods when interest rate expectations rise.
However, we see signs that this outperformance has flattened and that made us wonder how long it can continue. Our US and European factor indices suggest that there is a large dispersion of the length of value factor outperformance periods. The first half of the 1990s and the pre-Global Financial Crisis (GFC) part of the 2000s were dominated by long periods when returns on our value index would have been higher than on the Stoxx 600 or the S&P 500. During those 5-7-year periods of outperformance, missing the early part of the recovery would not have been a big issue. However, after the GFC, these periods became shorter and, although value outperformed in the early part of market cycles, timing became more important.
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Data as of 27 May 2021 unless stated otherwise.
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