Value investing has been pronounced dead several times over the last decade, as investors made money betting on highly valued growth stocks.

Growth stocks are usually the shares of companies that are in high-growth, new-age businesses that trade at high valuations in anticipation of higher profits in the future. In contrast, value stocks usually refer to companies in slow-growing and mature industries that trade at low valuations.

While the definition of growth and value would vary from investor to investor, with some even believing that growth investing is ultimately value investing, these are the broad definitions usually used during most discussions.

While defining value and growth styles quantitatively through simple ratios might not really do justice to these styles, they do offer some insights into market cycles.

For most discussions, stocks with a high price to earnings ratio, low dividend yields, and a high price to book ratio are considered growth stocks. Conversely, stocks with low price to earnings (PE) ratios, low price to book (PB), and high dividend yields are considered value stocks.

For instance, the MSCI World Value Index has a PE of 14.95, PB of 2.11, and a dividend yield of 2.84 per cent. In contrast, MSCI World Growth Index has a dividend yield of 0.75 per cent, PE of 31.99 per cent, and a PB that stands at 6.86. Some practitioners divide market cycles into growth and value cycles. These cycles are periods where growth and value stocks alternatively do well.

During the dot-com bubble, companies involved in old-economy businesses such as oil, metals, infrastructure and others traded at low valuations. In contrast, new-age internet businesses did extremely well. Later, from 2003 to 2006, value stock performed really well, while growth-related companies offered significantly lower returns. Usually, periods of low-interest rates augur well for growth companies. On the other hand, periods of higher interest rates usually signify a rapidly expanding economy with higher inflation, and hence, favour value stocks.

A comparison between the MSCI World Growth Index and the MSCI World Value Index would help us understand the stark differences in growth and value stock performance over the last few years. In 2017 the growth index was up 28.49 per cent, while the value index was up 17.95 per cent during the same period.

In 2018, the growth index was down 6 per cent, while the value index was down just over 10 per cent. In 2019, the growth index was up 34.14 per cent, while the value index was up 22.74 per cent.

In 2020, the value index went nowhere, while the growth index went up 34 per cent. Growth had significantly outperformed value in each of the last five years. By this point, many major publications had declared value dead. At the same time, newbie investors were fed narratives about growth stocks being perennial winners and that they should invest in such stocks without worrying much about the valuations – the valuations were underestimating the potential growth in profitability.

But the situation seems to have turned around, and mean reversion, the closest thing to gravity in the financial markets seems to be playing its role. In 2021, value outperformed growth by 139 basis points. Over the three months of the new calendar year, the value index has fallen by 0.48 per cent while the growth index has fallen by 9.6 per cent. The significant outperformance by value might signify a shift from growth to value.

However, it is too early to draw conclusions as in part, the outperformance could be temporary. Once supply-side issues are sorted out, some of these companies that are focused on commodity businesses would see prices for end-products falling.

Nevertheless, the situations do bring forward a valuable lesson for investors – no style of investing consistently offers high returns and both styles of investing revert to the mean. Different styles perform well during different periods, and most businesses are cyclical. High growth technology stocks have seen steep corrections worldwide, while FMCG stocks that are touted as evergreen stocks have seen a sharp decline in gross margins over the last few quarters. These FMCG firms had been relative underperformers during the 200-2007 bull-run as well. In contrast, energy and metal stocks have created immense wealth for investors within a small time span. However, whether the cycle has truly shifted to value, or whether the outperformance will be very short-lived remains to be seen.

VALUE INVESTING

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