Interest Rate Regimes as a Driver of the Value Premium

Figure 1 shows the relative performance of a pure value strategy versus the global equity market, as well as a GDP-weighted key interest rate as a proxy for the global interest rate environment. In the period before the financial crisis, when key interest rates were at moderate to elevated levels, the pure value strategy generated significant outperformance.

With the drastic interest rate cuts from 2009 onwards and the subsequent zero-interest-rate phase, however, the value premium almost disappeared completely; between 2014 and 2020, value even clearly underperformed. Only the rise in inflation from 2021 onwards marked a turning point: the major central banks tightened monetary policy and interest rates normalised again. At the same time, the performance of the value factor also improved.

This temporal overlap is no coincidence, but rather a consequence of the relationship between company valuations and interest rates: the value of a company is derived from its expected future cash flows, discounted back to the present. When the discount rate rises, cash flows far in the future lose more value than near-term earnings. Growth companies generate a large share of their profits only in the future.

Their valuations are therefore particularly sensitive to rising interest rates. Value stocks, by contrast, generate a larger share of their earnings in the near term. In an environment of higher interest rates, they become relatively more attractive. The value factor is therefore closely linked to the interest rate regime: higher rates favour value, while lower rates favour growth.

At first glance, it may seem surprising that these patterns occurred so uniformly across all regions, particularly as the major growth rally of recent years was driven by US technology stocks. On closer inspection, however, this parallel development makes sense: as the relative returns of a pure value strategy are measured against the respective regional market and on a neutralised factor, country and sector basis, the global discount factor dominates as a common driver.

Movements in interest rates, global monetary policy and the associated valuations have an impact worldwide and thus determine the relative attractiveness of value stocks versus growth stocks. Accordingly, changes in interest rate regimes are reflected in a similar timing pattern of the value premium across all regions.
 

Why the Magnitude of the Value Premium Differs

While the timing of the value premium is very similar, the excess returns generated versus the benchmark differ from region to region. A pure value strategy in Developed Asia, for example, delivered an active return of 1.82% per annum on average, compared with 0.66% per annum in Europe and 0.55% per annum in North America. These differences can be explained primarily by varying market structures.

Markets with lower concentration and a broader dispersion of valuations offer more opportunities to systematically identify and weight attractively valued stocks. In Developed Asia and Europe, the universe of potential value stocks is larger than in North America, where a small number of mega caps account for a substantial share of market capitalisation. In addition, the share of cyclical sectors is higher in these two regions than in the US.

Fundamental revaluations therefore tend to be reflected in share prices more quickly, supporting the active returns of value strategies.
 

Pure Value in the Assenagon Equity Framework

The results presented above relate to pure value strategies, whose objective is to capture the value factor as cleanly and unbiasedly as possible. Only when regional, sector-specific and factor-based influences are systematically controlled can the value premium be analysed cleanly and compared across regions. This is where Assenagon’s pure value strategies come in.

Deviations from the respective equity market are deliberately neutralised by replicating the country, sector and factor weights of the benchmark. Traditional value indices or funds, by contrast, often exhibit unintended biases, for example through overweight positions in individual countries or sectors. Their performance therefore reflects not only the value factor, but also these structural influences.
 

For Capital Market Investors

Despite significant differences in market structure and sector mix, developed equity markets show a synchronous pattern in the value premium over long periods. The decisive factor behind this is a common macroeconomic framework. When the discount rate rises in response to higher interest rates, lowly valued value stocks tend to show relative strength; when it falls, growth-oriented stocks benefit.

Against this backdrop, the development of the value factor over the past two decades can be explained largely consistently. Over the medium term, structurally elevated inflation and reduced monetary policy leeway are likely to stabilise the global interest rate level above that of the 2010s. The macroeconomic environment should therefore remain broadly supportive for value stocks.

Daniel Jakubowski, Sebastian Schmider

PS: Read the next issue to find out which factors shaped market developments in 2025.