The value style is in the early stages of what Mutual Series believes could be a multi-year outperformance relative to growth.
Value stocks spent over a decade in the wilderness. But after a rebound in 2022, we believe the style is on track for a multi-year resurgence. In our analysis, valuations remain cheap, earnings are growing, and the inflation and interest-rate environments may be supportive. Greater investment in the traditional industrial economy should be another positive support. Growth stocks may manage to do well in fits and starts, but the trend looks to us to be in value’s favor.
Valuations look attractive to us even after the value style’s outperformance in 2022. At the end of March 2023, the trailing price-to-earnings ratio for the MSCI World Value Index was about 13.5 times, compared with 31 times for the MSCI World Growth Index.1 This gaping disparity exists even though earnings growth for the two styles is nearly similar. Trailing earnings per share for the MSCI World Growth Index have expanded about 54% over the past decade. This performance is not too far ahead of the 45% rise in earnings of MSCI World Value companies.2 (See Figure 1). That means an investor who invests in the growth index is paying more per unit of earnings growth than an investor who chooses value.
The growth index has seen its multiple expand dramatically over the past decade, while the multiple for value stocks has barely budged (See Figure 2), leaving the premium over value at levels higher than the tech bubble of the early 2000s.3 This gap is unlikely to remain, in our view. Value company earnings have been strong, which we think may cause multiples to start to converge as the year continues.