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Thinking about Growth Investing vs Value Investing

May 30, 2019

Since the financial crisis bottom on 9th March 2009, the S&P 500 has delivered an annualised return of 17.3%.  Whether you were invested in value or growth companies was initially a secondary concern up until the last five or so years.  Since then, markets have been witness to the longest outperformance of growth companies versus their value brethren. 

Generally, the difference between the two strategies is that growth companies choose to reinvest their earnings back into the business, to aid their growth, whilst value companies are believed to have an unfairly discounted price relative to their fundamentals and typically distribute cash via a higher dividend yield.  Also, companies with a low price to earnings (P/E) ratio can also be considered value companies.

Source: Bloomberg

The above chart starts from the S&P 500 trough of 2009.  To date (29th May 2019), the S&P 500 Growth Index (TR), which tracks the growth-oriented components of the S&P 500 Index, has returned 460% compared to the S&P 500 Value Index’s ‘meagre’ total return of 356%.  To put this in some context, $1,000 invested in March 2009 would now be worth $5,600 if invested in the S&P 500 Growth Index and ‘only’ $4,560 if invested solely into the S&P 500 Value index.  If one was to dig deeper, the distortion of returns amongst the S&P 500’s value and growth sectors would prove even more divergent. 

The chart below better highlights how an allocation to the S&P 500 Growth Index would have significantly outperformed the S&P 500 and the S&P 500 Value Index.  This outperformance streak has been particularly notable since 2014, to the extent that the relative relationship between value and growth investing is currently at its most extreme.

Source: Bloomberg

There are good reasons why growth has significantly outperformed its value counterpart.  Since 2009 the world’s four largest Central Banks have pumped trillions of US Dollars into the global economy – Quantitative Easing (QE) – purchasing financial assets to stimulate the economy, to boost spending, and in turn to boost economic growth – the multiplier effect.  This has enticed investors to seek out companies deemed to have faster than the market’s earnings growth rates, which has proved a boon to the growth sectors and their underlying constituents.  Growth companies have further benefitted from the low levels of both interest rates and inflation.

There is no doubt that growth and value cycles can persist for a very long time, but this current growth cycle reflects the longest outperformance versus value investing, on record.  At some stage though, a shift back to favouring value investing will occur and investors need to be prepared. 

Are we on the cusp of this strategy change?  Our view is that the US economic cycle is in its latter stages and that there is a monetary shift from QE to tighter monetary conditions (higher interest rates).  Furthermore, earnings growth is slowing and there is a notable valuations gap between value and growth companies.  These are some of the factors that help create a positive outlook for value investing.

That said, interest rate rises are on hold in the US, there are no signs of inflation pressures and here at SGAM, we still expect single-digit earnings per share growth for 2019, which still represents a positive backdrop, and an environment whereby growth stocks could continue to outperform against expectations. 

The picture is mixed and there are no obvious signs why there should be an imminent change, seismic or otherwise.  Our thoughts are that investors should prepare for a style shift and gradually rebalance exposures towards the value sectors and companies.  The time will come when the current trend of growth outperformance reverses.  But for now, a reminder that value investing is not dead, merely undervalued.

Michael Zacharia
Investment Director

This article has been prepared for information only.  Any opinions or view’s expressed are for information purposes only. The views expressed herein are generally those of Swiss Global which sets the long term asset allocation models, long with both the strategic and tactical allocation.  Any material is provided for informational purposes only. It is important to note that the value of any investment and the income derived from it can go down as well as up. It may be affected by exchange rate variations and you may not get back the amount invested. Past performance is not necessarily a guide to future performance and individual taxation circumstances may vary. You should consult your tax adviser if in doubt. Any information provided does not constitute a recommendation and you should consult your adviser, consultant or financial representative for advice concerning your specific circumstances.  Any opinions expressed should not be relied upon and are subject to change without notice.  This material is for the sole use of the intended recipient and is for distribution only under such circumstances as may be permitted by applicable law.

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