Growth stocks have beaten value stocks since the 2008–09 financial crisis, marking the longest period of sustained outperformance for an investing style in history, portfolio manager Peter Hardy says. But amid warnings of an equities bubble, a reversion may — finally — be coming.
In 2020, growth stocks outperformed value by 35%, said Hardy, senior client portfolio manager of global value strategies with American Century Investments in Kansas City, Mo. That was the widest performance gap between the investing styles on one-year, three-year, five-year and 10-year bases.
“The spread on performance and the difference in the valuations between growth and value are similar to the tech bubble in ’99, 2000,” Hardy said in an interview last month.
“All of this says now is not the time to load the boat on growth stocks. Investors should ensure that they have exposure to value from a risk-return perspective.”
There was no real catalyst to the reversion in the spring of 2000 when value started outperforming, he said, aside from the weight of high valuations for growth stocks. Performance for the two investing styles is cyclical and difficult to time, but reversions can be “violent.”
Hardy pointed to four potential catalysts for a fresh value cycle. The first started in November with Joe Biden’s election as U.S. president and various vaccine makers announcing breakthroughs.
The Biden administration and the Democratic Congress have made Covid the top priority and are pushing a US$1.9-trillion stimulus package. These measures would contribute to a “normalization of economic activity,” which would benefit value stocks, said Hardy, who manages the Renaissance U.S. Equity Income Fund.
Broader economic growth would also support banks, a key component for value investors. Banks would benefit from a normalized yield curve and no longer having to worry about loan-loss provisions, Hardy said. The latter would free banks to increase dividends and buy back stock.
The housing market’s surprising strength throughout the pandemic is also a plus for value investors. “Housing provides massive benefits to value in that your more old-economy stocks reside on value benchmarks, and therefore housing strength has greater benefits to value stocks,” Hardy said.
With U.S. housing supply at historically low levels, housing strength will likely continue, he added.
The final catalyst for a growth-value reversion is moderating expectations.
“One of the reasons that growth stocks have beaten value stocks over the last several years is that their earnings growth has been better,” Hardy said. “The broadening of economic growth is actually leading to a reversal in that trend.”
An economic rebound would benefit value sectors more than growth sectors. Earnings in the financial sector are expected to grow 42% through 2022, Hardy said, compared to 34% for technology.
“Banks have substantially lower valuations and higher expectations for earning, which could be another catalyst for reversion,” he said.
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