Stocktake: Value stocks still look like a better bet

Value stocks around the world have been the big winners so far in 2021 but that has changed in recent weeks, with growth stocks like Apple, Amazon and Tesla rebounding and leading the market rally. Fund manager surveys show value stocks are still expected to outperform in the future; are they right?

Probably, judging by data from JPMorgan's Michael Cembalest, who notes value stocks outperformed from 2000 to 2007, only for growth stocks to lead the way from 2008 to 2020.

Growth stocks outperformed for a good reason from 2010 to 2017, says Cembalest; they delivered much faster earnings growth. After 2017, however, things got out of hand, with the valuation multiples of growth stocks ballooning from 19.5 to a “staggering” 33.7.

As for global-value stocks, they have enjoyed a sharp rebound and are now above pre-Covid levels. Although that suggests a lot of good news is priced in, they have “recaptured little of the underperformance they experienced” relative to growth stocks over the last decade.

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The same point is made by Bank of America's Savita Subramanian. Value stocks's current run of outperformance is only in its seventh month, but such cycles have historically averaged 33 months. Similarly, value has outperformed growth by about 20 per cent, well short of its 60 per cent average.

The difference in valuations between growth and value stocks remains near record levels, she says, suggesting growth’s recent rebound is unlikely to be a lasting one.