Growth outperformance still possible despite value rally

Despite the outperformance of value companies in the last few months, investors should not “give up on growth” stocks as they still have the potential to outperform.

In a webinar, BetaShares chief economist, David Bassanese, said the potential outperformance for growth stocks would depend on how long the inflation concerns persisted.

“Don’t give up on growth. Growth companies could still do well over the next three to six months depending on how long inflation concerns persist.

“This is debatable, it depends how much of it is short-term supply bottlenecks. If that is the case then you might see growth outperform again.”

Value stocks had been seeing their best performance lately after a decade of underperformance which was leading investors to consider them for the first time in years.

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The Russell 2000 Value index in the US had returned 58.8% over one year to 1 June, 2021, compared to 44.8% by the wider Russell 2000 index. This compared to returns of 273% by the Value index over 10 years to 1 June, 2021, and 322% by the wider index.

Performance of Russell 2000 Value versus Russell 2000 over one year to 1 June 2021

The areas which were benefitting the most from the inflation pressure was gold, energy, banks, and real estate while technology, growth assets, and income assets were faring badly

He said there had been comments likening the current market environment to the dotcom bubble but he felt this was not the case as the tech companies affected were already very successful and had strong profitability which was unlike 20 years ago.

“The tech companies affected are those that don’t have current earnings, their future earnings are built into the share price. So, when inflation rises, you have to discount those so [these companies] are more sensitive to interest rates and inflation as their earnings are in the future,” Bassanese said.