The past 12 months have seen a significant impact of style factors on global market performance, with the momentum factor the main contributor to global equity performance, according to Reece Birtles, chief investment officer at specialist equity investment manager Martin Currie.

But Birtles said investors are right to be concerned about recent skewed market prices driven by AI hype and large-cap stocks reminiscent of the tech bubble.

“Momentum leadership, especially by the Magnificent Seven and large-cap market concentration, has created market exuberance. US market P/E ratios imply unrealistic assumptions about sustained high profit margins and returns on capital,” he said in a recent market outlook.

“Our analysis of the macro story paints a picture of things in extremes, including valuation dispersion. The market's preference for growth and momentum has widened valuation gaps, making growth stocks more expensive and value stocks cheaper than normal.

“The 80-20 spread, which measures the dispersion between the cheapest and most expensive parts of the Australian market, is wider than average. These conditions suggest a potential outperformance of value stocks as the extremes relax to more normal levels of dispersion.”

Acknowledging that the timing of style cycles is always difficult to predict, Birtles confirmed that current conditions still favor value investing, whether as a stand-alone strategy or within broader multi-asset portfolios.

“Value-style stocks are cheap, while growth stocks, typically like Magnificent Seven and Nvidia, remain overvalued. As valuation spreads are narrowed, value style strategies offer a strong starting point,” he said.

As such, Martin Curry keeps the pulse of undervalued defensive names that can withstand economic downturns and grow despite persistent inflation.

“Energy distribution facilitator stocks such as Worley and Ventia Services Group are also attractive. AGL Energy, where the energy transition is creating power generation shortages, and Flight Center Travel Group, where the market is underestimating cost efficiency and margin leadership, are worth watching,” said Birtles.

Speaking at the 2024 Pinnacle Investment Summit last month, Firetrail managing director Patrick Hodgens raised concerns about the "overrated growth trap", stressing that cyclical growth companies - those that face consumers or the economy - are particularly vulnerable to market movements .

"If consumers or the economy slow down, as we're experiencing today, these companies are susceptible to lower earnings," Hodgsons told attendees.

“And we know that the market punishes earnings cuts. Stock prices follow earnings at the end of the day.

"We want [Firetrail’s] portfolio managers to look at each segment: value segment, growth segment and also quality segment. The reason we do it is because it's very difficult to predict which of these styles is likely to outperform in the next three or four years."

Looking at value stocks, Hodgens said the investment manager separates this corner of the market into two categories: "unloved" value and "compelling" value.

The former, which Firetrail says makes up about a quarter of the ASX 200, includes those the market has not yet recognized as undervalued. Those worth diving into, he explained, also need to demonstrate the potential to improve revenue.

"We are very happy to invest in these companies, but we need to see an improvement in earnings or a catalyst to boost the share price within 12 months." It should be a fairly short period,” Hodgens said.

“Part of the reason for this is that there are only about 30 cents of every active dollar chasing value companies these days. There just isn't enough money chasing these companies. So if that catalyst is too far away, these companies will remain cheap.