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Are value stocks making a comeback?

Warren Buffet, one of the most famous proponents of value investing, must be smiling right now. After underperforming growth stocks for almost a decade, value stocks have taken the lead.

Value stocks overtake growth

Since growth stocks had such a long run, it was hard to imagine value stocks being back in the spotlight. Especially when the gap in performance between the two significantly widened at the end of Q1 2020, around the same time the pandemic hit. The Financial Times reported that value stocks had their worst performance relative to growth that same year. However, the tide has begun to turn. As you can see from the graph below, value stocks have been outperforming growth since the beginning of the year:

Graph of value stocks compared to growth stocks since the beginning of the year.

Some analysts believe that this trend is here to stay for the coming years. But there are also many betting that this is just temporary and growth will once again be on top.

What is driving value stocks?

There are several theories analysts have pointed to for the recent outperformance of value stocks. One explanation some are pointing to is interest rates. The idea is that when interest rates are low, growth stocks benefit because money is cheaper, and investors are more likely to take more risk in hopes of a bigger pay-off. As we know, interest rates are rising, which favours value stocks over growth.

Inflation also plays a big part here. In general, growth stocks can be considered longer-duration assets with the expectation that there will be greater cash flows in the future. When inflation is high, this discounts these future cash flows. Value stocks, in contrast, have more stable near-term cash flows, giving them the advantage in this case.

Another factor related to inflation is pricing power. When prices are rising due to inflation, companies with actual earnings (value stocks) are likely to be better positioned to increase their own prices and retain profit margins.

A quick recap on growth and value stocks

If this jargon is new to you or you need a refresher, here are some of the main differences between growth and value stocks:

Trait Growth Value
Characteristics Strong earnings growth potential, quick growth, younger companies Steady income, slow growth, older more established companies
Valuation High P/E ratios Low P/E ratios
Sector examples Tech, Consumer Discretionary, Communications Financials, Energy, Healthcare, Industrials
Company examples Tesla, Netflix, Amazon Johnson & Johnson, Berkshire Hathaway, Proctor & Gamble
Dividends Less often More often
Volatility Higher Lower

Should I invest in growth or value stocks?

Choosing a growth or value investment strategy both offer benefits and drawbacks. It is important to make investment decisions based on your investment plan, considering factors like risk tolerance and investment horizon. Including a mix of growth and value stocks in your portfolio can help to diversify and spread risk.

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The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.

Sources: Bloomberg, Reuters, Investopedia, Visual Capitalist

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Note: Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products which match your knowledge and experience.

Note:
Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products which match your knowledge and experience.

We want to empower people to become the best investors they can be. By offering a universe of possibilities and choices on our user-friendly platform, we are removing barriers to make investing accessible to everyone: beginners or experts. You get access to a wide variety of products on more than 50 global exchanges to have the freedom to invest the way you like. In our world, you also get great value for money. So, without compromising an inch on the quality, security and range of our investment services, we offer incredibly low fees. Prioritising your needs has helped us become the leading European online broker. Our 2+ million clients and 80+ international awards are proof of our success.