In contrast, we believe businesses with shorter-duration cash flows are much more predictable. These companies tend to be more prominent in the value universe, where sectors such as financials, materials, healthcare and real estate are showing strong earnings growth potential (Display, above). And because of the nature of their business models, we think their five- to seven-year cash flows deserve a higher level of confidence from investors. As we see it, the combination of attractively valued stocks and shorter-duration cash flows provide a clearer view of equity return potential in a market that craves more certainty.
Forecasting Normalized Earnings Is a Value Specialty
The forces described above have created fertile ground for value investors. Even so, capturing the return potential of undervalued stocks is no easy task. It requires a deep understanding of how the cycle of a given product unfolds, when to buy and when to sell.
In other words, unlocking value is all about whether a company’s share price accurately reflects its normalized, mid-cycle earnings power. Value opportunities arise when the market becomes overly pessimistic on a company’s prospects, creating a disconnect between the valuation and future earnings potential. This approach differs from growth investing, which focuses on identifying companies capable of compounding earnings well beyond current expectations.
In today’s environment, we believe the value investing discipline is particularly relevant. As demand for physical assets increases and supply constraints persist, many value-oriented companies that are rooted in the physical world are ripe for rerating. Sectors such as commodities, financials and real estate, which are more prevalent within the value universe, tend to perform well during inflationary periods, addressing a prominent concern for investors today. What’s more, since 2025, the MSCI World Value delivered solid risk-adjusted returns, posting a Sharpe ratio of 2.3—exceeding the broader MSCI World’s 1.4, with lower levels of volatility.
Discipline Helps Counter Disruption
Of course, value stocks aren’t inherently defensive in all environments, and not every value strategy is positioned to capitalize on today’s conditions. It takes a highly disciplined security selection process and robust risk controls to avoid “value traps” by buying stocks that appear to be attractively valued but are in fact facing structural challenges.
With the right approach, we think value equities can play a complementary role in allocations that may have become heavily weighted toward growth stocks in recent years. By focusing on reasonably priced businesses that generate solid cash flows over time, investors can build portfolios that are well equipped to navigate an era of heightened uncertainty and structural change.
