The two charts below really caught my eye. The first shows that long-term returns from ‘value stocks’, those that look cheap on things like cash flow multiples, are around all-time lows compared with ‘growth stocks’, which are those whose earnings are growing faster than the market. Mention “all-time lows” and you don’t need to be a died in the wool contrarian to think there might be an opportunity there.
Chart 1 shows rolling 10-year returns from value vs growth are as low as they’ve been in the last 80 years.
Chart 1: rolling 10-year total return difference between value and growth stocks
Chart 2 is a little busier, but basically it’s saying the growth trade is awfully ‘crowded’ right now: according to Morningstar 94% of money invested by 1,756 different global equity funds is currently held in growth stocks. That looks seriously disproportionate on the face of it.
Chart 2: value vs growth split of funds invested by global equity funds
A smart friend of mine pointed out we probably need inflation to go up before the value stocks will outperform since so many of them are cyclical companies that will rely on some pricing power.
That prompted me to look at the first chart in a slightly different way: if you think of the broad sweep of interest rates, which peaked in 1980 and quite possibly bottomed in 2016, it’s possible growth stocks have benefited from that long period of falling inflation and rates – see chart 3.
Chart 3: falling interest rates appear to have underwritten growth stocks
The upshot? At some point value stocks will rule again, however, as I’ve written before, trying to time the market based on factors like growth and value is just as hard as trying to time it based on any other variable.
The other thing is, even if you’d timed the market perfectly in switching to growth, there have been periods when the ups and downs within the overall trend would have made the ride a pretty gut-wrenching one. How many would have stuck it out?
When things look out of whack on a relative basis the trick is to have some exposure. Investing doesn’t have to be all in or all out, you can just change your weightings a bit.
Hat tip: Schroders
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