Since 2008, US growth stocks (particularly in faster-growing sectors such as technology) have tended to perform better than US value stocks, as the chart below shows.
As the performance gap between growth and value widens, more investors may be wondering when this dynamic between growth and value might change.
However, a different pattern emerges over longer periods of time. As the chart below shows, value outperformed growth for a 10-year that peaked about a year after the market bottom during the financial crisis. Since then, growth investing has had generally better performance.
A Bit of Background
In the United States, at the peak of the tech bubble, growth had significantly outperformed value for a number of years. By February 2000, the 10-year average annual return differential had reached 6.49% in favor of growth.1
Only 10 months later, in December 2000, that 10-year differential had been wiped out.
In this article, Stephen Dover, head of equities at Franklin Templeton Investments, recalls some of the prominent tech names that were leaders during the boom and bust.
“If you look back to the technology names before the technology crisis, who did it look like was going to win? It looked like it was going to be—let’s see if you can remember these names—Yahoo, CompuServe, Alta Vista, Compaq computer, Netscape. Great companies, multi-billion dollar companies, great big impact on the indexes. They’re all gone or bought out or something else has happened. That’s the difficulty of growth.”Stephen Dover, March 13, 2018
Dover says one of the reasons why growth has outperformed value over the past 10 years is due to monetary policy that has kept global interest rates low. The lower an interest rate is, the greater the value of future earnings.
“All things being equal, when you have artificially low interest rates, growth companies [are] worth more than value companies because earnings in 10 years become more valuable than earnings in one year.”Stephen Dover, March 13, 2018
That said, Dover cites rising inflation and higher interest rates as potential headwinds for growth stocks.
Why Value May Catch Up with Growth
As growth stocks have outperformed value in recent years, some of our investment professionals think value stocks have become cheap, based on historical levels.
According to Templeton Global Equity Group’s analysis of companies in the MSCI All Country World Index universe, at the end of the second quarter of 2018, global valuations spreads (the gap between the market’s cheapest and most expensive stocks) were the widest they have been in at least 30 years.2
“Put another way, value globally has only been this cheap 1% of the time in the past three decades. This could be a meridian hour for value investors.” – Templeton Global Equity Group, July 2018
Valuations may also explain why US value stocks outperformed US growth stocks during July 2018, as the chart below shows.
In this article, Franklin Mutual Series CEO Peter Langerman explains why he thinks a shift to higher interest rates could benefit value investing going forward.
“We are not predicting that there’s going to be a period of dramatic value outperformance versus growth. Rather, fundamentals suggest to us there should be more of an equilibrium reached. And so, we think it’s an environment that’s more attractive for us as value investors than it has been for the past several years.”Peter Langerman, May 14, 2018
Characteristics of Growth and Value Investing
Growth investing focuses on companies that are growing at a faster-than-average rate. These companies often have accelerating revenues, earnings and cash flows, but also typically have relatively high price-to-earnings (P/E) metrics. Often, dividend payouts are low or non-existent, since profits are used to expand the business.
Value investing focuses on companies whose stock prices don’t reflect their intrinsic or fundamental value. The companies are often mature, and their stocks may have suffered due to a temporary earnings setback or an economic or political event hampering their industry. They are often characterized by low P/E or price-to-book ratios and sometimes by higher-than-average dividend yields.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any industry, security or investment.
This information is intended for US residents only.
What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated or may decline further in value. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Investments in foreign securities involve special risks including currency fluctuations, and economic and political uncertainties.
1. Source: Russell Indices. Growth stocks represented by the Russell 1000 Growth Index. Value stocks represented by the Russell 1000 Value Index. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses and sales charges. Past performance is not an indicator or guarantee of future performance. Additional data provider information available at www.franklintempletondatasources.com.
2. Source: MSCI Indices, as of June 2018. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses and sales charges. Past performance is not an indicator or guarantee of future performance. Additional data provider information available at www.franklintempletondatasources.com.