Growth vs value stocks: Who will win the race this year?
By Jenny McCall
12:05, 14 January 2022
Growth stocks have historically outperformed value stocks, but this trend may not continue in 2022, according to analysts and experts.
Since the end of last year, the S&P 500 Value Index has risen by over 8%, whereas the S&P 500 Growth Index has dropped by over 2%.
Apple (AAPL) and Microsoft (MSFT) have market caps of over $2tn and they are focused on growth. Although it is also notable that Warren Buffet – one of the greatest and most well-known investors globally – grew his own personal fortune of $100bn investing in value stocks.
Growth stocks, which are defined by earnings per share are characterised by rising sales and earnings, which means investors are happy to pay a little more, with the expectation that growth would catch up.
Growth stocks tend to be found in the technology industry and other fast-growing sectors. Examples of growth stocks would be Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG).
Value stocks on the other hand tend to expect lower growth rates and are typically automakers, financial companies, and commodity producers.
In 2022, who would win the race? We gather a few analyst comments to get to the bottom of this.
a contrast between:— David Cox, CMT, CFA (@DavidCoxWG) January 5, 2022
value vs. growth
oil stocks vs. software pic.twitter.com/UMiLhR8WrI
A real dilemma
James Brumley, a former stockbroker, believes that value stocks would beat growth stocks “I'm going to go with value stocks here. Value hasn’t done as well when compared to growth stocks, since 2017. But market trends can change,” he says.
And understandably, not everyone shares this view. Terry Smith, a British fund manager at Fund smith Equity believes that investors would be wise to place their bets on growth stocks.
Smith said in his annual letter to investors: “Even if you manage to identify a truly cheap value or reopening stock and time the rotation into that stock correctly so as to make a profit, this will not transform it into a good long term investment.”
The conflict is real, even among seasoned investors and fund managers.
MSCI Value vs. MSCI Growth ratio : Bottoming process is in place for a potential long term outperformance of value stocks... pic.twitter.com/IVdXCvC2an— Philippe Preite, CFA, CFTe (@PhilippePreite) January 6, 2022
According to a report compiled by Bloomberg News, which surveyed over 100 asset managers between December 3 and December 13 last year, a majority picked value stocks as the ones that would outperform growth in 2022.
A look at some of the key continuing trends this year could help make a decision.
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Covid’s impact on stocks
Economies across the world have felt the impact of the pandemic crisis but as the world learns to live alongside the virus, Covid-19 may stop affecting the markets as it does now.
At the pandemic’s peak in 2020, growth stocks boomed, especially technology equities. As the world shut down and employees worked from home, companies such as Netflix and Amazon reaped the rewards of the Covid world.
Whereas, financial companies – traditionally considered as value stocks – lost ground as investor concerns increased.
We saw companies such as Ultra Petroleum file for Bankruptcy, alongside consumer goods group True Religion Apparel which closed its shutters.
“Growth stocks saw pandemic benefits because investors drifted towards more household names, especially those that have got through the 2008 recession,” said Viraj Desai, senior portfolio manager, TD Ameritrade.
As we remerge from the pandemic, it appears that value stocks are gaining more ground. As vaccines got introduced and the world started to recover, value stocks rebounded and started to outperform with the reopening of trade. The idea of rising interest rates also helped value stocks.
“As the economy opened again last year, value stocks gained. But Covid can still affect it. Variants could cause value stocks to lag, but they also perform very well in moments of recovery,” added Desai.
Value has outperformed from the peaks of the Covid-19 lockdowns, driven by a reversion in energy prices, with the reopening trade helping industrials, which in turn lifted company financials.
Oil price should stay high, this will have a negative effect on us and business.— Junior Smith (@JuniorBuffett) January 10, 2022
General inflation should stay persistent as everything goes through the pumps this year.
I'm expecting some pressure on growth stocks but value stocks should continue its upward trend.
The arguments for growth stocks include inflationary pressures and the lingering effects of Covid 19 virus variants, which still hold sway over the market.
Piers Curran, managing director at Amplify Trading told Capital.com that he saw growth stocks taking lead in 2022.
“We will get another leg in growth stocks now. We went through a phase where growth stocks underperformed value coming through quarter three because people realised inflation wouldn’t drop,” Curran said.
“As long as the global economy regains momentum as various variants subside, then what you are left with is a lot of stimulus in the system, on the fiscal and monetary side. You also have a lot of household cash which should lead to a nice phase of growth outperforming value,” he argues.
Although the US data release on Wednesday showed that inflation had accelerated at the fastest pace in December since 1982 and that it had exceeded 6%. Inflationary pressures mean that value stocks can raise prices, as they tend to be more mature and have earnings and margins to improve.
Rising interest rates
Rising inflation could lead to a rise in interest rates and when it comes to rising interest rates, experts believe growth stocks would inevitably be affected.
RBC Capital Markets strategist Lori Calvasina said, “Expensive stocks tend to underperform against less expensive stocks when the 10-year yield rises.”
“Central banks are more hawkish which hurts growth stocks,” Curran added, to which Coghlan concurred saying, “Yes, growth stocks look very vulnerable to a Fed hiking cycle. Particularly those that are valued on a price to cash flow basis.”
So, there still may be some light at the end of the tunnel for growth stocks.