Why Value Investing Is Outperforming Growth on the ASX in 2026
The Australian sharemarket has witnessed a dramatic rotation in investment styles, with value strategies delivering returns that have left growth-focused portfolios trailing. Over the 2025-26 financial year, the S&P/ASX 200 value index rallied 20.2 per cent, surpassing the Australian growth index by more than 25 per cent—its largest outperformance in over 16 years, according to S&P Dow Jones Indices.
The Macroeconomic Drivers Behind the Shift
This resurgence did not emerge in isolation. The Reserve Bank of Australia’s aggressive interest rate hikes to combat inflation have fundamentally altered the calculus for equity investors. For nearly a decade, growth stocks dominated as low rates boosted the present value of future earnings. That paradigm has now reversed. As Michael Goldberg of the Collins St Value Fund observed, in a risk-off environment, attributing value to current earnings is far easier than predicting future earnings.
The geopolitical dimension has amplified this trend. Heightened tensions in the Strait of Hormuz and expectations for higher mortgage rates for longer have reinforced the importance of real assets and pricing power. Reece Birtles, Head of Australian Equities at ClearBridge Investments, noted that companies in sectors such as energy and infrastructure have demonstrated resilience and the ability to pass rising costs through to consumers.
Valuation Dispersion Creates Fertile Ground
What makes this environment particularly compelling for value investors is the extraordinary dispersion in valuations across the Australian market. ClearBridge’s analysis indicates that valuation spreads remain historically elevated, even after narrowing from extreme levels seen a year ago. This dispersion means that while the headline index may appear expensive, significant pockets of undervaluation persist beneath the surface.
Morningstar’s data underscores this point vividly. The market-cap-weighted price-to-fair-value across their ASX coverage universe sits at approximately 1.23x, indicating the largest companies trade at a premium. Yet the equal-weighted price-to-fair-value is just 0.91x, revealing that the average ASX share trades at a discount to fair value.
Where Value Investors Are Finding Opportunities
ClearBridge’s portfolios have gravitated toward what they term “fuel security” plays—businesses like Ampol, Santos, AGL Energy, and Aurizon Holdings that have demonstrated pricing power in sectors underinvested for two decades. These companies benefit from structural demand dynamics that are unlikely to reverse in the near term.
The rotation has been further reinforced by proposed changes to capital gains tax announced in the 2026 Federal Budget. The replacement of the 50 per cent CGT discount with inflation indexation and a 30 per cent minimum tax floor on real gains from July 2027 incentivises investing for profits and income over future capital gains. As Birtles noted, these changes further bolster the appeal of value stocks given their propensity to pay dividends.
A Structural Rather Than Cyclical Shift
The magnitude of value’s outperformance—cumulatively approximately 53 per cent over the past five years—suggests this is more than a fleeting rotation. The combination of elevated interest rates, geopolitical uncertainty, and tax reform has created conditions where current earnings and tangible assets command a premium over speculative future growth. For investors with the discipline to focus on fundamental value, the ASX currently offers one of the more compelling opportunity sets in recent memory.
