Relaxed monetary policy and an abundance of free cash created an environment where growth stocks thrived throughout the past decade, but the tables have rapidly turned in favour of value this year.
It has been more than a decade since investors have had to consider switching out of growth funds, which have led the market during a time quantitative easing and low interest rates, but this year has been different.
The end of the pandemic caused chaos with supply chains, while the war in Ukraine has created a commodity spike unlike any seen for many years.
Many investors have watched their growth portfolios sink after years of outperformance, but there are still small pockets of the market where growth continues to outperform.
Trustnet screened 51 different growth indices around the world and their respective value counterparts to find out where growth still dominates this year despite the overall global cycle.
Latin America
Markets within the Latin America region have generally thrived this year as the global rotation towards value puts their large mining industry in high demand.
This has led value funds there to outperform in 2022, with the MSCI Emerging Markets Latin America Growth index falling 14.8 percentage points behind this year.
However, some markets within the region have not followed this trend - growth funds in Chile, for example, outperformed value by the largest margin of all indices reviewed, with a 37.3 percentage point lead on their value equivalents.
Despite many growth portfolios declining throughout 2022, the MSCI Chile Growth index was up 77.7% since the start of the year.
The mining sector is typically seen as a value area, but Edward Evans, emerging market equities manager at Ashmore Group, said that “style should be treated with care in emerging markets”.
Markets within the developing world are highly sensitive to top-down drivers, which can screw the line between what is growth and what is value.
He added: “The evolving and dynamic nature of emerging markets mean that companies that were once considered ‘growth’ or ‘value’ can change their stripes over time.”
Chile is the biggest copper producer in the world, with 28% of the global supply coming from Chile, according to the International Trade Administration.
Its mining sector accounts for 11% of the nation’s gross domestic product (GDP) and over half of all its exports, making it a crucial industry to the country’s economy.
While the mining sector is considered a value region for most developed markets, Evans implied that growth funds in these countries may have had exposure.
Likewise, the growth indices of other mining dominant markets such as Columbia and Mexico beat their value counterparts by 7.3 and 0.8 percentage points respectively, generating a total return of 8.6% and 6.8% since the start of the year.
Asia
Growth funds within Asia were no exception to the global trend, with the MSCI AC Asia Growth index declining 13.1% since the start of the year while the value equivalent climbed a modest 0.4%.
Some markets within the region were an anomaly, such as growth funds in India, which beat value by 11 percentage points since the start of the year and generated a total return of 17.6%.
Vipul Mehta, head of Asia Pacific ex Japan at Nomura Asset Management, said that the nation’s high GDP growth could be one of the leading factors in its outperformance this year.
“My personal belief is that in a high growth economy, it would be foolhardy to own value stocks,” he said.
“Why would you own something for the value of its assets? You would own an asset if it generated growth, generated profits and generated returns, which is what has been the nature of the market over a long period of time.”
Historically, India’s GDP has grown between 4% to 7% annually over the past two decades, but this could accelerate to more than 15% over the next three to five years, according to Mehta.
Value funds in the region have not necessarily performed poorly, with the MSCI India Value index making a positive return of 6.6% since the start of the year, but the high GDP characteristics in India make a more compelling case for growth investing.
Mehta said: “There are periods in which these value stocks have done well, but they have been rather cyclical in nature and investors in India generally have preferred the secular growth stories that are available to them.
“To that extent, investors have crowded into India and that seems to be catching a lot of fever these days, so valuations do get out of control at times.”
Europe, the UK and the US
Most growth funds in developed markets failed to outperform this year, with value indices in the UK, US and Europe leading by 17.7, 17.4 and 12.8 percentage points respectively.
However, there were some pockets in Europe where this was not the case. Growth funds in Austria, for example, beat value portfolios by a wider margin than India this year, with a 11.9 percentage point lead, but the MSCI Austria Growth index was still down 20.6%.
Similarly, growth beat value in places such as Denmark and Czech Republic this year, but both growth indices made a loss of 5% and 0.8% despite the relative outperformance.
Source: FE Analytics