Everywhere you look, asset prices are falling. That means it’s been a challenging year for those looking to park some extra cash in a place where it will actually generate a return, to say the least.
But a team at Goldman Sachs, led by chief US equity strategist David J. Kostin, had some advice for investors looking to navigate these treacherous markets in a research note on Tuesday.
His advice centers on an age-old question for stock market investors: Which is better, value stocks or growth stocks? Or what if, these days, it’s neither?
Growth vs. Value
For the uninitiated, value stocks are priced lower relative to their fundamentals (ie revenue, net income, cash flow, etc.) than most publicly traded companies, while growth have much richer valuations because they have growth rates that are significantly higher than the market average.
Lyft is a good example of a growth stock. The ride-sharing giant is expected to grow sales at a 27% pace this year and is highly valued by the market, but posted negative net income in the spring quarter. The growth of the company is what needs to be invested, in other words.
Hewlett-Packard, on the other hand, is a solid example of a value stock. The multinational tech giant’s revenue grew less than 5% in the spring quarter, but its shares are trading at just eight times earnings, compared with an average price-to-earnings ratio of 13.1 for the S&P 500. There’s a lot of reliable value there.
Choosing between value and growth stocks is always a challenge for investors, but in the years since the Great Financial Crisis, growth stocks have seen an incredible surge. era of overcoming led by high-flying technology firms.
Now, however, with the Federal Reserve raising interest rates, recession risk rising and inflation peaking, Goldman says value stocks are about to have their day.
“Current relative valuations within the stock market imply that the value factor will generate strong returns over the medium term,” the Goldman team wrote, adding that value stocks should outperform growth stocks by three percentage points over the year. next year.
Investors may want to be cautious about investing in growth stocks going forward because these stocks will need a “soft landing” and a decline in interest rates to outperform the S&P 500, Goldman argues.
On top of that, growth stocks look particularly expensive in terms of earnings and earnings multiples.
“Exceptionally high valuations can sometimes be justified by expectations of exceptionally fast earnings growth. However, today’s expectations, even if proven accurate, do not appear to justify current growth stock multiples,” the Goldman team wrote.
Goldman strategists also noted that value stocks have historically outperformed growth stocks at the onset of recessions. And with most economists predicting a US recession this year, it may make sense to avoid high-priced growth names and look for value plays.
However, it is important to note that Goldman economists still see only a one in three chance of a US recession over the next year and a 48% chance of a recession in September 2024.
Still, the Goldman team also noted that value stocks have historically outperformed growth stocks around inflation spikes, as measured by the consumer price index (CPI). And Goldman’s chief economist, Jan Hatzius, said in August that he believes inflation has already peaked, even if it is likely to remain above historical norms through the end of the year.
“Value has outperformed growth in the 12 months since seven of the last eight core CPI inflation spikes year over year,” the Goldman team wrote on Wednesday.
Of course, there is another possibility that investors might want to consider. Goldman did not mention this strategy in his note and does not include stocks at all.
A safe haven?
While value stocks may outperform growth stocks over the next year, many investors are likely unwilling to return to the market amid calls from investment banks for more pain ahead.
Morgan Stanley, for example, has repeatedly warned that a toxic economic combination of “fire” (inflation and rising interest rates) and “ice” (sloping economic growth) will keep stock prices subdued through the end of 2023.
Many investors have looked to cash as a safe haven during these tough economic times, but Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, argues that “cash is still trash” due to rising inflation.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a research note on Wednesday that there is another option that may be more profitable.
“In the current uncertain environment, we favor the Swiss franc as the safe haven of choice in currency markets,” he said. “The nation is less affected by the European energy crisis than its neighbors, as fossil fuels account for only 5% of electricity production in the country. The currency is also backed by a central bank that is willing and able to quickly bring inflation to target.”
The Swiss franc has appreciated more than 7% against the euro since June, as growing recession fears continue to drive investors into the safe-haven asset. And as Stéphane Monier, chief investment officer at Lombard Odier Private Bank, said in a August 31 article:
“The Swiss National Bank (SNB) is countering the price increase with higher interest rates. Unlike other policymakers, he has signaled a willingness to intervene to keep the Swiss franc strong.”
The Swiss franc also has a history of outperforming the dollar. Since its creation in 1999, the franc has gained 30% against the dollar.
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