GMO's Inker Busts a Recession Investing Myth

Like most consumers, investors like a good deal — a stock trading at a steep discount to the company’s fundamental value. When a potential recession looms, however, they may question whether investing in these so-called deep value stocks makes sense.

Contrary to a common view, such companies aren’t shakier in a recession, according to a recent white paper from investment firm Grantham, Mayo, Van Otterloo & Co., co-founded by investment strategist Jeremy Grantham.

“A core concern for investors contemplating taking advantage of the incredible cheapness of deep value stocks today is the potential for a near-term recession. A common perception is that value stocks are more cyclical and therefore more vulnerable to economic downturn,” wrote Ben Inker, who co-heads GMO’s Asset Allocation team.

“We find that this conventional wisdom is false: Empirical evidence shows that the value stocks actually tend to outperform in recessions. Value stocks have the charm of low expectations,” so have less to lose in an economic environment hitting companies across the spectrum, he added.

Since there’s no universally accepted definition for value stocks, there’s no one way to measure  exactly how well this category does in a downturn, according to Inker. But nuanced differences in those models don’t matter much, he added, because value “has done just fine across most recessions,” no matter the definition.

The COVID-19 downturn in 2020 marked the only recession in which value stocks performed poorly overall, and Inker suggested that situation was so unique, given the nationwide business shutdown, that it differed from a typical recession.