Markets have moved away from the style of growth that has dominated over the past decade and toward value investing, but there are still areas where growth is leading.
Loose monetary policy and an abundance of free cash created an environment in which growth stocks thrived over the past decade, but the tables quickly turned in value’s favor this year.
It’s been more than a decade since investors had to consider switching from growth funds, which led the market during a time of quantitative easing and low interest rates, but this year has been different.
The end of the pandemic has thrown supply chains into chaos, while the war in Ukraine has created a spike in commodities the likes of which has not been seen in many years.
Many investors have seen their growth portfolios sink after years of outperformance, but there are still small sectors of the market where growth continues to outperform.
Trustnet evaluated 51 different growth indices around the world and their respective value counterparts to discover where growth continues to dominate this year despite the overall global cycle.
Markets within the Latin America region have generally prospered this year as the global rotation to value creates high demand in its large mining industry.
This has led value funds there to outperform in 2022, with the MSCI Emerging Markets Latin America Growth Index falling 14.8 percentage points behind this year.
However, some markets within the region have not followed this trend: growth funds in Chile, for example, outperformed value by the largest margin of all indices reviewed, with a 37.3 percentage point lead over their peers. of value.
Despite many growth portfolios declining throughout 2022, the MSCI Chile Growth Index is up 77.7% since the start of the year.
Mining is often seen as a value area, but Edward Evans, manager of emerging markets equities at Ashmore Group, said “style needs to be treated with care in emerging markets.”
Markets within the developing world are very sensitive to top-down drivers, which can shift the line between growth and value.
He added: “The dynamic and evolving nature of emerging markets means that companies once considered ‘growth’ or ‘value’ may change their stripes over time.”
Chile is the world’s largest copper producer, with 28% of global supply coming from Chile, according to the International Trade Administration.
Its mining sector accounts for 11% of the nation’s gross domestic product (GDP) and more than half of all its exports, making it a crucial industry for the country’s economy.
While the mining sector is seen as a value region for most developed markets, Evans hinted that growth funds in these countries may have had exposure.
Likewise, the growth rates of other dominant mining markets such as Colombia and Mexico outperformed their value counterparts by 7.3 and 0.8 percentage points respectively, generating a total return of 8.6% and 6.8% since the beginning of the year.
Growth funds within Asia were no exception to the global trend, with the MSCI AC Asia Growth Index falling 13.1% since the start of the year, while the equivalent stock rose a modest 0.4%.
Some markets within the region were an anomaly, such as growth funds in India, which have outperformed by 11 percentage points since the start of the year and generated a total return of 17.6%.
Vipul Mehta, manager of Nomura India Equity fund, said the nation’s high GDP growth could be one of the main factors behind its outperformance this year.
“My personal belief is that in a high-growth economy, it would be foolhardy to own value stocks,” he said.
“Why would you own something for the value of your assets? You would have an asset if it generated growth, it generated earnings and it generated returns, which is what the nature of the market has been for a long period of time.”
India’s GDP has historically grown between 4% and 7% annually for the past two decades, but this could accelerate to more than 15% in the next three to five years, according to Mehta.
Value funds in the region have not necessarily underperformed, with the MSCI India Value Index posting a positive 6.6% return since the start of the year, but India’s high GDP characteristics make a more compelling case for growth investment.
Mehta said: “There are periods where these value stocks have done well, but they have been quite cyclical in nature and investors in India have generally preferred the secular growth stories that are available to them.
“To that extent, investors have flocked to India and that seems to be heating up a lot these days, so valuations sometimes get out of hand.”
Europe, United Kingdom and United States
Most growth funds in developed markets failed to outperform this year, with value indices in the UK, US and Europe leading by 17.7, 17.4 and 12.8 percentage points, respectively.
However, there were some pockets in Europe where this was not the case. Growth funds in Austria, for example, outperformed value portfolios by a wider margin than India this year, leading by 11.9 percentage points, but the MSCI Austria Growth Index still fell 20.6%. .
Similarly, growth outpaced value in places like Denmark and the Czech Republic this year, but both growth rates posted a 5% and 0.8% loss despite relative outperformance.
Source: FE Analytics