Why value stocks may perform better than the growth stocks in 2022

Amid the recent volatility in the market, the debate over value and growth stocks have come to the fore. What should one choose – value stocks or growth stocks?

From the pandemic lows, the recovery was swift and sharp as the overall market cap went up from ₹102 trillion to ₹280 trillion, a jump of 174 percent. The BSE Sensex also jumped from its pandemic low of 24,000 to 62,200, a sharp 159 percent gain.

In this phenomenal journey from the pandemic low, growth stocks did extremely well with 2 sets of companies participating in the rally:

(1) Companies, which posted significant growth in both revenues and profits; and

(2) Companies, which posted growth only in revenues but not in profits or even posted losses. This includes sectors and businesses like aviation, e-commerce, cinemas, etc.

In both sets of stocks, their valuation multiples breached previous record highs.

Then came unfortunately heavy foreign institutional investors (FIIs) selling of domestic equities to the tune of close to $20 billion since October 2021 which led to a nearly 7 percent fall in the broader indices and also the overall market-cap getting chopped off by ₹20 trillion.

A steep fall in stock prices was seen in both sets of growth stocks (one set, which had growth in revenue and profits and the other set which had no growth in profits or even posted losses).

However, the second category fell the most while the first category of stocks saw a significant correction in the valuation multiples.

The unprecedented selling in the growth stocks led to the investors' focus shifting to value stocks which are still available at attractive valuations. The whole calendar year 2022 (CY2022), in our view, could see the value stocks outperforming the traditional growth stocks.

High inflation would impact the aggregate demand in the system and therefore, it would affect the growth opportunities for the several growth sectors.

Some of these growth sectors, which use oil and oil derivatives, metal and even natural or agricultural resources (like wheat, etc.) would see steep price rises in their outputs, which in turn would impact the demand for the final products.

Hence, the growth stocks are expected to be victims of possible significant contractions in both earnings and valuation multiples. Therefore, value stocks, which hold a lot of deep assets and significant unlocking potential, and also relatively cheaper valuations, are likely to perform better in 2022.

However, it would be better for the investors to make a balanced allocation between growth versus value in 2022.

The FIIs, who have been selling heavily the Indian equities, are likely to turn into net buyers in FY23. A majority of them would still prefer traditional growth stocks due to issues of liquidity and also successful past experience.

Hence, the individual investors may make a balanced allocation of 50:50 between the growth and value stocks.

However, it would be still better to avoid the new age businesses, which fail to make profits now even if they are perceived as growth businesses as many of them do not have strong entry barriers and are also likely to bleed for more than one to three years.

(The author is the founder & head of research, Equinomics Research & Advisory Pvt. Ltd)

Disclaimer: The views expressed above are of the analyst and not of MintGenie.