“Are you a growth investor or a value investor”?
“I was a growth investor but since I didn't put a stop loss and now the stock if down 70%, I am a value investor.”
How many of us have heard this one before?
The current stock market has made value investors out of a lot of growth investors. Just like certain business cycles, growth and value investors, too, have a cycle. When the market corrects between 15-30%, one sees mushrooming of value investors. When markets boom, so do growth investors.
With that out of the way, it in indeed true that the current market volatility has perplexed even seasoned investors. “How to tread in such a market while it swings between gains and losses amid uncertainty?" is a question most are seeking answers to.
In the last one and a half months, the market has endured many negatives, including the ongoing Ukraine war, rate hike by the US Fed concerns over inflation and reemergence of Covid in some parts of China and Europe. All these factors weighed on market sentiment. The recent correction in the market has brought the classic debate of growth versus value stocks to the fore.
But first, what are growth and value stocks?
Some companies are predicted to grow at a higher rate than the market perception. Those companies are called growth companies and stocks of such companies are growth stocks. Market believes these stocks have the potential to outperform the market, i.e. grow at a rate faster than the average of market.
On the other hand, stocks that are traded at a lower rate than their inherent value are known as value stocks — also known as stocks on a discount. These are available at cheaper valuations even as they have the potential to expand and provide significant profits in the long run.
Time to shift focus to value?
In the recent correction in the market, the valuation of many stocks has fallen sharply. Investors joke now that once growth stocks are now the value stocks after the recent fall.
There has been a meteoric rise in the number of new investors in the wake of the coronavirus pandemic which contributed to the strong rise in the market from the March 2020 bottom.
Most of these new investors have not seen all the cycles of the market and they have the misplaced optimism that the market may remain in the higher orbit for long. This belief has lifted the growth stocks to lofty and unsustainable valuations.
"Most of the first-time investors have witnessed their first bull market and they believe that stock prices will continue to rise forever. Due to this, a lot of stocks are trading at a historically high valuation and provide no margin of safety; this is especially in the case of growth stocks. Mean reversion is an inevitable characteristic of the stock market, thus there will be the situation of underperformance of richly valued growth stocks," Santosh Meena, Head of Research, Swastika Investmart, underscored.
Indian economy is in very good shape post-Covid due to historically low interest rates, green shoots visible in real estate, capex cycle revival, and the government’s focus on infrastructure. This has created a possibility of a new economic growth cycle, which will lead to the outperformance of economy-facing stocks.
"Economy-facing stocks like infrastructure, metals, cement, capital goods, industrial stocks, etc., are generally categorized as value stocks. These stocks are out of favour since 2008, so there is a high probability that value stocks will outperform growth stocks in the coming years," said Meena.
Meena recommends investors increase allocation towards value and growth at reasonable value stocks. "Investors should be averse to momentum growth at any price stocks, he said, adding that value stocks do well in times of rising interest rate scenario and there are lots of areas like capital goods, infrastructure, real estate, banking, and financials that are providing great values to investors in India.
Many analysts usually suggest a combination of value and growth stocks both in one's portfolio. However, the current scenario is such when it makes sense to shift focus to value stocks from growth stocks.
Prashant Bhansali, Director - Mehta Equities, believes with increasing risk of inflation due to high commodity prices, the days of easy liquidity are over and investors would need to shift focus to value stocks from growth stocks.
"Increase of interest rate across the world, will force the investors to move from growth to value stocks. Unless, central banks think otherwise and change the stance of not hiking rates, we will see shift from high growth (technology/ consumer) to value stocks (industrial/ staples/ banking)," said Bhansali.
Likhita Chepa, Senior Research Analyst at CapitalVia Global Research observed global markets are prone to higher inflation as commodity prices have gone up especially crude oil and higher bond yield is also impacting markets negatively. She advises investors to bet on value stocks, especially from energy and power space.
"Reliance Industries, ONGC and Tata Power might do well. Technically, these stocks are likely to do well and we might see double-digit returns in next 4-6 months," she said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.