Growth sectors, such tech, have been doing better than value stocks so far in 2023.
- The MSCI World Growth index is up 9.7% in 2023 as of 6 March, versus just 3% for the comparable value index.
- This has partly reflected optimism over an end to central bank rate rises in the first half of 2023.
- Tech stocks are more vulnerable to rising interest rates, which reduces the current value of more distant profits.
But we expect value to regain the upper hand, with macro conditions and valuations presenting headwinds for growth stocks.
- Value stocks have historically outperformed in periods when US inflation has exceeded 3%, which looks likely to persist through 2023.
- Fears of a higher peak in rates are a bigger drag on growth sectors such as tech.
- The tech sector trades at an 18% premium to its 10-year average on a 12-month forward price-to-earnings ratio. The US market, which has a high exposure to such stocks, trades at a 13%premium, as of 6 March.
So, tactically, we think investors should diversify beyond growth and US stocks.
- We remain least preferred on the tech sector overall, especially US tech.
- We like value stocks. Among defensive sectors, we see greater opportunity in consumer staples than in healthcare.
Did you know?
- After more than a decade of expanding valuations, the IT sector’s 12m forward price-to-earnings ratio has declined from 29x to 21.8x, as of 6 March. This compares to 15.5x for the broader MSCI World Index. And the sector still trades at an 18% premium to its 10-year average.
- Consumer staples, by contrast, trade on 19.2x 12 month forward earnings, in line with its 10-year average.
We prefer value stocks to growth stocks. The MSCI World Growth Index has outperformed its value equivalent so far this year. But we think an environment of stubborn inflation and higher interest rates should support value stocks’ renewed outperformance in the months ahead.
Main contributors - Vincent Heaney, Christopher Swann
Content is a product of the Chief Investment Office (CIO).
Original report - Will growth outperform further?, 7 March 2023.