Halfway through 2022: Will value stocks continue to outperform growth?
As we approach the halfway point of the year, most global stock indices are in the red due to the well-publicised fears of persistently high inflation, the subsequent monetary tightening response from the Central Banks and a deteriorating economic growth outlook. For equity investors the dominant feature of the market has been the unceremonious fall to grace of growth stocks that were already thriving in the low interest rate, pre-pandemic environment but then boomed in the stimulus-fuelled aftermath. In 2022, however, the table turned in favour of value stocks as the reality of hawkish central bank action ate into the appeal of expensively priced companies offering only high future cash flows.
Many of the narratives and ‘stories’ that were essentially all part of the same ‘growth’ movement have taken a severe knock this year, including social media platforms, cryptocurrencies, electric vehicles and ESG investing (most genuine ESG stocks are ‘growth’ in nature) – no doubt all will play their parts in the future but simply their pricing had simply become too far detached from their fundamental valuations.
While stock market analysis is part driven by models and maths, a catchy story is always required to substantially move market sentiment and investors can hugely profit from believing in it. So it proved with the multi-year outperformance of growth stocks (which are dominated by large US tech firms) that started with the acknowledgement of the potential of the tech sector being undervalued following the financial crisis of 2008, before morphing into a belief that successful long-term investing simply required finding companies with the best potential growth. Companies that did not fit this mould, (i.e. traditional consumer stocks, energy businesses, industrials etc) were left behind thus leading to an unnatural division of the market into growth and value stocks. Though the relative outperformance in 2022 has been marked, value investors have hardly enjoyed bumper returns with most ‘value’ baskets in negative territory albeit to a far lesser degree than their growth counterparts. The question for investors now, is of course, value or growth from here – has the dose of reality fully sunk in or is there a new story to follow?
Of course the sensible portfolio will include a mixture of both, so as not to be too exposed to either style, but to achieve enhanced returns over the longer term, investors should be able to tilt their holdings to reflect their convictions and expected market conditions. Much of this decision will be influenced by ones’ view of the market in general. Through this years’ volatility it has been clear that where there have been short-term rallies, growth stocks have outperformed, but the longer downward trend has favoured value stocks. As such, investors who believe the bottom of the current cycle has yet to be touched would be better off focusing on price and valuations, whereas those who see the current weakness as a buying opportunity should likely err towards growth.
With the economic data across the world appearing to have peaked we suspect that value remains set to outperform in the medium term as economic growth declines. Indeed, this is starting to be reflected in companies earnings: over the past month growth stocks estimates have noticeable slipped, while value stocks have actually seen improved estimates for the coming periods. Of course a good number of these revisions are linked to the commodity sector, and as such value stocks are not impervious from an economic slowdown.
However, the prospect of substantially lower commodity prices from here currently seems fanciful as the war in Ukraine and the tight-oil supply are poised to keep prices elevated. Meanwhile, the tech sector is still valued above its’ pre-pandemic level, and the latest CPI print in the US has once again forced the Federal Reserve to emphasize its mandate to curb inflation over the interests of equity investors – putting highly valued companies back in the firing line should equities remain under pressure. Value stocks that tend to offer more near-term cash flows and an already-diminished valuation, by contrast, could enjoy a further lease of life. Ultimately, the trajectory of inflation will be key to how this rivalry plays out, but it seems that in 2022 value could be on course to beat growth for the first time in six years.
Jonathan Unwin
Deputy Head of Asset Management and Advisory at Banque Havilland S.A. – UK Branch
( source: Citywire )
