about 2 months ago • 2 mins
Last year wasn’t the best for value stocks – far from it, actually. When you stack their performance against their flashier growth counterparts, it was their second-worst year ever. Put simply, it means that the strategy of buying undervalued stocks for their potential price increases fared a lot worse in 2023, compared to investing in companies that have strong earnings growth.
You can see this in the chart: the MSCI World Value Index eked out a modest 8.9% gain last year, while its growth cousin soared by 36%. This difference – which has never been wider, except in 2020 – says a lot about interest rates and the speedy, nonstop expansion of the tech sector.
See, rising interest rates usually hit growth stocks harder than value stocks because a big chunk of the cash flow for growth companies is expected to come in the future. This means the current earnings of growth companies lose some of their appeal, compared to the increasing yields on safer assets like Treasury bonds. However, even with rates on the rise last year, value investing struggled, mostly because it snubbed the high-flying (and expensive) tech sector, which – helped by the AI frenzy – was the driving force behind most of the S&P 500 gains.
Now, AI’s not slowing down and interest rates are widely expected to come down this year. And that might have you thinking you should toss value investing out the window. But you might want to think twice about that: value shares look like a better-than-ever bargain, trading at 13 times their projected earnings, while those flashier growth stocks are commanding a higher, 25 times multiple. That difference is twice as wide as the average of the past 17 years, according to Bloomberg data.
This year, it may make perfect sense to have a mix of value and growth in your portfolio – they’re not the sworn enemies you might think. Even value investing guru Warren Buffett would tell you that “growth is part of the value equation”. In other words, it’s okay to pay a bit more for speedier-growing businesses, even if the premium seems extravagant. When the market undervalues growth, grabbing those faster-growing opportunities is still staying true to the value investing ethos.
If your portfolio already tips heavily toward the tech-heavy S&P 500, maybe sprinkle in some value by branching out into a European index fund. The MSCI EAFE index, which is packed with European stocks, has an 18% chunk devoted to financial stocks, compared to the S&P 500’s 13%. Diversification could be the secret sauce, giving your portfolio the best of all worlds.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.