Growth stocks’ strength in 2020 capped a decade of dominance. From 2010 through 2020, the MSCI World Growth Index outperformed the MSCI World Value Index by 170 percentage points (pp). In 2020 alone, the Growth Index beat its Value counterpart by 34pp. But in the last three months, the winds have started to change. From November through January, Value has crept back and led Growth by 270 basis points. We believe this trend may continue over the next few months.
We think the reasons for Value’s resurgence are three-fold: 1) Starting from a deep discount there is ample room for recovery, 2) vaccine distribution and economic reopening may disproportionately benefit Value sectors, and 3) a coordinated period of growth and reflation will support the style as well.
1. The current valuation spread is as high as it has been since the 2000s dot-com bubble, with a roughly 17-point difference in price-to-earnings ratios between the MSCI World Growth and Value indices. At two standard deviations above its historical mean, such periods have historically been associated with subsequent Value outperformance. And as Exhibit 1 illustrates, there is ample room for Value still to run. The underperformance of Value stocks has been very different to past recoveries. Where Growth-style equities recovered to pre-pandemic highs in July 2020, Value was just nearing that point in January 2021.