As vaccine hopes take centre stage, will value stocks regain favour among investors?

By Mark Gilbert

Hopes that vaccines will soon replace economic lockdowns as our best defense against the coronavirus have stirred speculation that value stocks will regain favor among investors. A guy who until recently oversaw $1.6 trillion has a strong argument that growth stocks will continue to be a better investment.

Hiro Mizuno was chief investment officer of Japan’s Government Pension Investment Fund for five years until the end of March. Now a Tesla Inc. board member and special adviser to Japan’s Ministry of Economy, Trade and Industry, here’s what he tweeted at the weekend:

'(Growth vs Value) Value investing is to bet on other investors’ misjudgements, while growth investing is to bet on growth stories of company set by CEO. Very different mindsets. I personally like growth strategy where I could find visionary & disruptive companies,' tweeted Hiro Mizuno (@hiromichimizuno) on November 21, 2020

Pitting the disruptive vision of entrepreneurs against the hopes of uncovering a real find amid the clutter of beaten down stocks provides a compelling way to frame the debate about whether growth stocks, classified as shares of companies with accelerating revenues, can keep outpacing value stocks, equities whose value is deemed not to reflect some measure of underlying worth.

It seemed like the equation might be changing. Value stocks enjoyed a renaissance this month when vaccine euphoria prompted investors to rotate into shares trashed as the pandemic crimped the global economy. Their returns beat their growth counterparts by five percentage points in the first three weeks of November.

That’s sparked talk of a global revival. On Tuesday, Bank of America Corp. strategist Savita Subramanian recommended U.S. financial and energy stocks as her top two “unapologetically cyclical and value-focused” sectors. Strategists at Barclays Plc, led by Emmanuel Cau, on Wednesday recommended investors in European shares should overweight value versus growth. And John Woods, Credit Suisse Group AG’s Asia Pacific CIO, said Asian value stocks will outperform in the next six months provided a vaccine becomes widely available.

So could it finally be value stocks’ turn in the sun? Investment advisers who’ve called for a reversal of that trend have been proven wrong time and again.
In the chart above, the biggest stocks in the Bloomberg Value Index include investment bank JPMorgan Chase & Co., telecoms operator AT&T Inc. and energy company Exxon Mobil Corp. The growth index is dominated by the FAANGS: Facebook Inc., Amazon.com Inc., Apple Inc., Netflix Inc. and Google’s parent, Alphabet Inc.

The picture doesn’t change no matter the time period. So far this year, growth stocks have gained about 24 per cent, while value stocks are down by 5 per cent. In the past 12 months, growth is up by 28 per cent, value down by 2.5 per cent. Over three years, growth delivers 66 per cent versus just 12 per cent for value. And since early 2007, when the index histories begin, growth is up more than fourfold while value has a bit more than doubled in value.

But hope for value stocks seems to spring eternal. A net 24 per cent of investors overseeing $526 billion expect value to outperform growth the coming year, according to Bank of America’s November survey. That’s the most bullish call for value in the monthly poll since February 2019.

Mizuno says that investment style fails to capture disruptors that sacrifice earnings early on to build a dominant market share. Jeff Bezos’s Amazon is probably the best example of that kind of company. “Growth investing for me is to bet on the ability of CEO and his/her staff to deliver more than people (including myself) can imagine,” Mizuno also tweeted.

By contrast, trying to identify value stocks takes a cocky — and risky — self-assurance that the wisdom of the investing crowd has missed something fundamental about a company’s worth. If a share is cheap, it’s probably cheap for a reason.

You could even stretch the argument to cover the recent enthusiasm for Bitcoin versus gold. As my colleague Lionel Laurent recently pointed out, the digital currency barely figures in buying and selling in the real world and yet its gains have rapidly outpaced the yellow metal this year.

Gold has real-world applications that make it inherently valuable, but many investors still view it as nothing more than a pet rock, limiting the potential universe of buyers. To its fans, Bitcoin represents a transformative technology with the potential to dislodge fiat currencies as a means of payment. In effect, it’s a bet on the future of finance with a side wager that its momentum will continue apace — like a disruptive growth stock.
The current enthusiasm for value stocks may well have further scope to run. But in the longer term, the trend that’s been your friend seems likely to persist. Even once the pandemic is over, backing entrepreneurs will prove more profitable than buying allegedly undervalued equities in the hope that mean reversion will rescue them from the bargain basement.