Value Signals Outside Equities
The core value idea from equities — cheap assets tend to outperform expensive ones over the long run — has analogues in currencies, bonds, and commodities, though what "cheap" means has to be redefined for each asset class.
Prerequisites: The Value Factor
In equities, value investing has a familiar form: buy stocks that are cheap relative to their fundamentals, such as earnings or book value, and expect their prices to converge back toward fair value over time. The same logic — an asset priced away from a reasonable estimate of its fundamental worth tends to drift back toward it — shows up in currencies, government bonds, and commodities, but each asset class needs its own definition of "cheap" because none of them has a stock's earnings or book value to anchor to.
Value works across asset classes as the same basic bet in different clothing: define a fundamental anchor appropriate to the asset — purchasing power parity for currencies, real yield levels for bonds, the cost of production or storage for commodities — and buy what's priced cheap relative to that anchor, expecting slow convergence rather than a quick correction.
The anchor changes, the logic doesn't
For currencies, the classic anchor is purchasing power parity: if a basket of goods costs meaningfully less in one country's currency than another after converting at the current exchange rate, that currency is cheap by PPP, and value strategies bet it appreciates over years, not weeks. For government bonds, value is often measured relative to a model of the real yield a country's growth and inflation fundamentals should justify — a country with high real yields relative to its underlying fundamentals is a "cheap" bond market. For commodities, value can be anchored to the relationship between spot price and the cost of production, or to how far the futures curve sits away from its own long-run historical range.
Worked example
Suppose a country's currency trades such that, after conversion, an identical basket of consumer goods costs 25% less there than in the US — a large PPP gap suggesting the currency is undervalued. A value strategy buys that currency against the dollar, expecting it to appreciate over a multi-year horizon as the price gap closes, either through the currency strengthening or through relatively higher inflation at home eroding the real gap instead. Separately, if a commodity's spot price sits well below the estimated marginal cost of producing an incremental unit, a value strategy can go long, expecting that persistently unprofitable production gets curtailed, tightening supply and pushing price back up toward the cost anchor.
What this means in practice
Cross-asset value strategies are typically combined into a single multi-asset value score, applied consistently the same way across currencies, bonds, commodities, and equities, and often blended with momentum since the two factors have historically performed well in different environments and partially offset each other's drawdowns.
Fundamental anchors like PPP or cost-of-production can be wrong or slow to matter — a currency can stay "cheap" by PPP for a decade if capital flows, interest-rate differentials, or political risk dominate the exchange rate instead, and cost-of-production estimates for a commodity shift as technology changes what it actually costs to produce. Value signals define a direction to lean, not a timeline for when convergence happens.
Practice in interviews
Further reading
- Asness, Moskowitz & Pedersen, 'Value and Momentum Everywhere'