Why Value Stocks, Lagging This Year, Should Overtake Growth Stocks

Franklin Templeton says high rates and infrastructure needs will favor lower-cost shares.

Growth stocks have long ruled, but they took a pasting in bear market 2022, as tech shares’ appeal fell victim to rising interest rates. But now, with rate hikes expected to abate, growth stocks are back on top. Value stocks, which had a moment of relative superiority last year (meaning minimal losses) are back in their customary lagging position.

Not for long, according to investment firm Franklin Templeton. “Value stocks spent over a decade in the wilderness,” a recent company blog post noted. “But after a rebound in 2022, we believe the style is on track for a multi-year resurgence.”

The trajectory of both styles is best seen by comparing two exchange-traded funds that institutional investors use often, employing data from research outfit Morningstar Direct. The SPDR Portfolio S&P 500 Growth ETF averaged 13.2% annually over the past 10 years, versus the SPDR Portfolio S&P 500 Value ETF’s 9.8%. But last year, the growth fund tumbled 29.4%, while its value counterpart dipped just 5.3%.   

So far in 2023, the old pattern has resumed: The growth ETF has advanced 8.5%, and the value one is up only 5.3%. Much of value’s laggard behavior is due to worries about regional lenders in the wake of Silicon Valley Bank’s and Signature Bank’s collapse. Financials are a key component of value.

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To Franklin Templeton, value’s thriftier multiples are one factor that will help it overcome growth’s lead: At the end of March, the trailing price/earnings ratio for the MSCI World Value Index was about 13.5 times, compared with 31 times for the MSCI World Growth Index, the blog post said. The growth index has expanded “dramatically over the past decade, while the multiple for value stocks has barely budged,” the firm observed.

While the interest rate spiral appears to be near its end, it’s widely expected that rates will stay at their current level for some time. That, in Franklin Templeton’s estimation, will continue to wear away at growth stocks, in particular tech names, whose earnings and cash flows are booked years into the future. That means their profits are discounted at a higher level, lowering their present value.

Globally, there are rich value opportunities outside the U.S., where indexes are more tilted toward tech, the firm reasoned. “The makeup of the European market is also more heavily skewed toward value stocks, creating a richer hunting ground for opportunities,” Franklin Templeton contended. Upcoming infrastructure buildouts will boost value stocks even more, it added.

“The growing need for improved defense capabilities, liquified natural gas plants, windmills and semiconductor factories are all positive for value stocks, in our view,” Franklin Templeton stated.


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