Value stocks have a good chance to outperform growth rivals in the next year, according to experts, but there are many wildcards that could turn the tables in favour of growth.
Hiking cycles are the enemy of growing companies because of the way they are valued – as their cashflows are further out into the future, they are more sensitive to rising rates.
However, despite the initial collapse in 2022 and subsequent rise of value, growth businesses resurfaced again as the artificial intelligence (AI) boom boosted tech names.
This makes the prediction of which will outperform tricky and riddled with caveats.
Canaccord’s Hibbert: There’s a ‘marginal’ base case for value to outperform
The dominant investment style will depends on the type of easing cycle that we get, according to Tom Hibbert, multi-asset strategist at Canaccord.
“In the soft-landing scenario that the equity market seems to be pricing in, whereby the Federal Reserve will cut rates once or twice this year and we continue to see disinflation, value stocks could benefit from a broadening out of the market rally and from the fact that they're trading so cheaply relative to growth,” he said.
“This is our marginal base case, with a probability of 50%.”
In this scenario, sectors such as industrials, financials and those that are more sensitive to economic cycles, would do well.
This contrasts with what the bond market is pricing in, which is interest rates being cut substantially by the end of this year, which would only happen if the economy contracts, Hibbert said.
“In that environment, growth-oriented companies will continue to outperform because of their quality and resilience. At the same time, defensive sectors are also likely to outperform – read healthcare, consumer staples and utilities.”
That was given a 30% likelihood.
Finally, if inflation picks up again, or if rates stay high for longer (a 20% chance for the strategist), it will still be time for large-caps and the market will remain concentrated in big tech.
Aviva’s Nakos: Value could outperform outside the US
The “inherent strengths” of US mega-cap growth stocks could be overridden by their high valuations and crowded positioning, for which they could face short-term correction risks, according to Sotirios Nakos, multi-asset portfolio manager at Aviva Investors.
On top of that, if the economic cycle shifts, slower growth could “challenge their optimistic earnings projections”.
While growth names are “well-positioned for the long term and under various scenarios”, value stocks may have “a short-term window to outperform” if the economic environment aligns favourably; but the path to its outperformance is “narrow” and requires “a careful balance of moderate growth and rate cuts”.
“Value stocks, especially outside the US, could outperform growth stocks in the near term due to attractive valuations and light positioning,” he said. “This hinges on several factors: a broadening and acceleration of the earnings cycle, the delivery of non-recessionary rate cuts, and resilient growth.”
Hargreaves’ Cook: History should favour value, if AI doesn’t intrude
Over the very long term (over 25 years), value investing has outperformed growth investing, with the recent decade being the historic anomaly, according to Hal Cook, senior investment analyst at Hargreaves Lansdown.
It’s difficult to know whether that is down to quantitative easing alongside low and stable interest rates, or whether technological developments “mean it really is different this time”.
“Technology has developed at an ever-increasing rate, which is among the factors that have driven growth to outperform value.”
However, higher interest rates mean two key things: the cost of borrowing is higher and investor discount rates are higher, which drive value higher more recently.
“Going forward, it’s difficult to know what will do better. History tells us that value should outperform over the long term. But the wildcard is artificial intelligence (AI), which could spur growth investing to new heights,” he said.
To answer the question of how to invest, Cook stuck with the “boring but sensible answer”: a diversified portfolio that covers both styles.
AJ Bell’s Khalaf: Value will do well to keep up
Laith Khalaf, head of investment analysis at AJ Bell, also agreed that as long as tech remains in the ascendancy, value stocks “will do well to keep up”.
Growth has more things going for it too, including the trend towards passive funds and the popularity of fund managers taking a longer-term buy-and-hold approach, all of which are reasons to take growth’s side.
Value stocks also need value investors with money to buy them, and the amount of money in value-orientated strategies has fallen, relative to more successful growth approaches in recent years, as Khalaf noted.
“Ultimately no-one can say with any certainty whether growth or value will outperform over the next one, five or 10 years, so the key to prudent portfolio construction is to have a blend of both,” he concluded.