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A great market shift is coming in 2020, top investor says

Prepare for this major market shift in 2020, top investor says
Prepare for this major market shift in 2020, top investor says

As stocks cross into the next decade at records, one top investor sees a major market shift underway.

Rob Arnott, chairman at Research Affiliates, says it's time to get back into value as its years-long downtrend begins to reverse.

"We've seen more and more people give up on the idea of value investing, which we think is a little strange because we're in the only major industry in the global macro economy where people hate bargains," Arnott said on CNBC's "Trading Nation" on Thursday. "Value has been battered down now for 12 years, most particularly from 2015 to 2019, so the last five years have been daunting. Value is cheap."

Over the past five years, the IVW S&P 500 growth ETF has added more than 70% while the IVE S&P 500 value ETF has increased 41%. Value stocks are seen as undervalued relative to the market, while growth stocks are names that investors will pay a premium on for earnings growth.

Arnott says the underperformance of value since 2007 has been "breathtaking."

"It's driven by several narratives. One narrative is that growth is 'growthier' than it used to be. Objectively not true. Another is that gross margins are better than they used to be. Objectively not true," said Arnott. "The narrative that actually explains the performance is that value has been getting cheaper and cheaper. It's gone from trading at about one-third the valuation multiples of growth stocks to roughly one-eighth the valuation multiple."

He says this moment could prove a "spectacular opportunity." He is betting on a big move higher in the Research Affiliates' RAFI fundamental index, which has a value stock lean and has outperformed even the broader value group.

Arnott also says a rotation to value could be critical with the potential of an economic slowdown on the horizon.

"If there's an economic slowdown — Warren Buffett famously said when the tide goes out you see who's standing naked, and growth stocks are built on a presumption of growth," said Arnott.