⛳Choose Growth or Value?⏱

A key highlight of our recent QnA session has been the choice of stocks or categories of stocks. Two themes came to our mind, Value vs Growth. First, the debate over which class of stocks will perform better in the coming year appears less clear than we hope for. 

Pika World believes it matters less. 

Let’s run through some flow of thoughts. 

✈️Growth x Value Stocks🗽

The two classes had taken a turn to outperform each other. Value stocks that are more economically sensitive were the clear winners in the early part of the year. The Vanguard S&P 500 Value ETF (VOOV) was up by around 28% from late Sept to mid-march 2021. This outwins the gain of 18% seen in the Nasdaq 100, which is a primary growth stock index. 

It isn’t surprising as that period was a recovery phase from Covid-19 when demands started to increase and households had cash on hand from the generous stimulus program. 

Fate changed from late March onwards as Nasdaq climbed 27% compared to a mere 8% gain in the value fund. 

🍟The Outlook for Value & Growth🔦

The question requires us to assume economic growth for 2022. Pika World expects a material slow down in 2022 compared to 2021. This, therefore, works poorly for value stocks. Nonetheless, many value stocks are already pricing in for the slower growth. Thus their shares might be relatively cheaper. 

The forward P/E multiple for S&P 500 value stocks is around 12 points less than the growth stock multiple index. For the past 10 years, the spread of such a gap has been about 5 points. Hence, we do not see the value stocks as a reflection of their true earnings growth compared to those of growth stocks. 

Indeed, we are unlikely to see mega gains in value stocks because of the mid-cycle transition economy stage. Economic growth tends to moderate after an initial spike in a post-recession/Covid era. 

Hence, we might not see meaningful interpretation in the debate between value or growth stocks as a critical determinant point of discussion. 

🎙What’s the Thoughts?💵

The framework would perhaps be a new class of asset: Quality stock. One that has a competitive business structure to deliver decent earnings growth, independent of the economic cycle. It also means a strong balance sheet such that when the Fed raises the interest rate, it has less debt, thus less affected by the headwind. Investors may look at iShares MSCI USA Quality Factor ETF( (QUAL), which gained around 26% this year, mainly in pace with Nasdaq 100. 

Strong pricing power could also reflect the characteristic of quality stock. This is useful in elevated inflation and pricing power periods, ensuring profit growth sustainability. 

We hope you enjoy this read. We expect FOMC to be a market mover, and Pika World will be right with you in this volatile period!

Cheers, 

Pika Nat.