Value and growth are on the opposing ends of the investment spectrum, and the first set of ideas usually weighs heavily on the other when cost of money is rather benign.
So, conventional wisdom would suggest value stocks outshine growth in the current global environment, where central banks are driving down rates to fuel consumption.But thats where traditional wisdom seems to be making little sense.
Since the financial crisis began a decade ago, global central banks have cumulatively effected 710 interest rate cuts and expanded balance sheets by $12 trillion.
Yet, inflation remains at the low end of their comfort zones and wages have hardly edged up in the developed world.Investors are still seeking growth instead of value in a world where cost of money seems to have had minimal impact on fuelling consumption.
The MSCI World Growth Index has outperformed the Value Index by 7 per cent in the past one year.India has been mirroring the trend of outperformance of growth in the past five years.
The MSCI India growth index has outperformed the value index by 10 per cent in the past five years, and valuation premium of the growth index over value stocks expanded to 65 per cent, compared with the 10-year average of 62 per cent.In general, value stocks trade at lower than their historical valuation but offer higher earnings growth.
Growth stocks trade at premium valuations but offer low steady earnings growth.The US Federal Reserve has altered its stance to accommodative, and Fed futures are suggesting three 25 bps cuts in 2019.
Europe isnt pointing to anything significantly different either.Global bonds worth $12 trillion are yielding negative.
Consequently, the hunt for yield across risky assets has pumped up pricey assets further.
The Dow has risen 14.6 per cent in the current year, and of 30 stocks making up the gauge, 13 are trading at more than one standard deviation away from mean.
Prominent US companies trading at expensive valuations are Walmart, Walt Disney and P-G.Similarly, the German DAX and the French CAC 40 have 30 per cent and 20 per cent of their constituents trading at more than one standard deviation higher than mean.
Back in Mumbai, 12 of the Nifty 50 stocks are trading at more than one standard deviation away from their 10-year average, as per Bloomberg.