Higher for longer puts value back in the conversation 

When the Reserve Bank of Australia lifted the cash rate by 25 basis points to 4.60 per cent on 29 September, its fourth increase of 2026, it pointed to the supply side.

“The conflict in the Middle East has broadened and global energy prices are now much higher than had been assumed in the August forecasts,” the Monetary Policy Board said, adding that inflation “is still too high”. 

Figures from the Australian Bureau of Statistics the following day bore that out. Headline inflation rose to 4.0 per cent in the year to August, up from 3.5 per cent in July. Automotive fuel rose 14.8 per cent in a single month on higher world oil prices and the end of federal fuel excise relief. Trimmed mean inflation held at 3.6 per cent for a third straight month. 

David Walsh, head of investments at RQI Investors, has long argued that inflation of this kind resists the usual cure. He predicted this trend all the way back to 2022, as the invasion of Ukraine and the Shanghai port lockdowns choked global supply. At that point, he warned that “interest rates are likely to continue to rise, but they are probably ineffective against the supply side inflation pressures we are seeing at the moment.” 

Four years on, the source of the shock has moved but the mechanism is unchanged. The closure of the Strait of Hormuz cut off about 20 per cent of world crude supply, according to RQI’s research. Oil peaked at around A$165 a barrel.

Walsh has noted  that at one point transport costs accounted for about 7.7 per cent of global GDP, and that “any increase in costs will map directly and forcefully onto price inflation.” 

Why valuations matter 

The link between inflation and value runs partly through valuations. Higher expected inflation means future cash flows are worth less in present value terms (unless those cash flows are inflation-linked, which is unusual).

Growth stocks, whose share prices depend heavily on profits expected far into the future can be particularly sensitive, while cheaper value stocks with shorter duration hold up better.

When growth expectations also stay subdued, markets often favour companies with more certain short-term opportunities. They tend to favour these over expensive names that rest on the promise of stable long-term growth.

Walsh sees today’s conditions fitting that template closely. “In an environment when growth is penalised through inflation or through higher interest rates or through lower growth generally in GDP, for example, value tends to do better,” he says.

He points to high energy prices and the knock-on from the conflict in Iran, “hitting inflation, hitting growth”, alongside a possible deflation of the AI bubble whose effects he believes are still poorly understood. 

“I certainly think we’re more in spring than summer when it comes to value investing and quant investing.”  

That view draws on a long memory. Many quantitative factors stopped working between 2018 and 2020, a period known as the quant winter. The market also heavily penalised value as a style. Walsh sees the conditions that preceded it as patterns that recur through market history. They include the overbidding of growth companies, a technology boom and significant market concentration.

“The four most dangerous words in the market, ‘this time it’s different’,” he says. “It’s not different, we believe we’ll see these things repeating over and over again. And on average, value may outperform as a style, and tilting towards value will give you a reward because growth is overbid.” 

The client conversation 

For RQI, value does not mean simply buying the cheapest stocks. Its approach starts by weighting companies according to their economic footprint. It uses accounting measures of business size rather than market capitalisation.

Additional factors are then overlayed to adjust those weights using insights such as quality, momentum and sentiment. The aim is to capture the long-term value premium while assessing other drivers of returns and reducing exposure to potential value traps.

“You need to be careful that you buy good quality, cheap companies in that environment,” Walsh notes. 

A systematic process lends itself to that discipline. Quant models assess companies across valuation, quality, momentum, growth expectations and sentiment at the same time. RQI observes that many of these factors have performed well together in recent years. That creates a supportive backdrop for quant strategies.

All of this makes value a timely factor to raise in client conversations. Portfolios built through a decade of low rates have absorbed a growing weight of expensive growth stocks. The cash rate is now at a 15-year high and inflation is running above the RBA’s 2 to 3 per cent target band. The environment Walsh describes is no longer theoretical.

“There’s a lot of uncertainty, a lot of expectations of higher inflation and lower growth into the future,” he says. “Those sort of things are going to play into the hands of value.”