Fears of a potential economic slowdown are clouding the outlook for value stocks, which have outperformed broader indexes this year in the face of surging inflation and rising interest rates.
Value stocks — commonly defined as those trading at a discount on metrics such as book value or price-to-earnings — have typically underperformed their growth counterparts over the past decade, when the S&P 500's gains were driven by tech-focused companies such as Amazon and Apple.
That dynamic shifted this year, as the Federal Reserve kicked off its first interest rate-hike cycle since 2018, disproportionately hurting growth stocks, which are more sensitive to higher interest rates.
The Russell 1000 value index is down around 13 per cent year-to-date, while the Russell 1000 growth index has fallen about 26 per cent.
This month, however, fears that the Fed's monetary policy tightening could bring on a US recession have shifted the momentum away from value stocks, which tend to be more sensitive to the economy.
The Russell value index is up 0.7 per cent in July, compared with a 3.4 per cent gain for its growth-stock counterpart.
"If you think we are in a recession or are going into a recession, that does not necessarily ... work to the advantage of value stocks," said Chuck Carlson, chief executive at Horizon Investment Services.
The nascent shift to growth stocks is one example of how investors are adjusting portfolios in the face of a potential US economic downturn.
BofA Global Research on Thursday cut its year-end target price for the S&P 500 to 3,600 from 4,500 previously and became the latest Wall Street bank to forecast a coming recession.
The index closed at 3,863.16 on Friday and is down 18.95 per cent this year.
Corporate earnings arriving in force next week will give investors a better idea of how soaring inflation has affected companies' bottom lines, with results from Goldman Sachs, Johnson & Johnson and Tesla among those on deck.
For much of the year, value stocks benefited from broader market trends.
Energy shares, which comprise around 7 per cent of the Russell 1000 value index, soared over the first half of 2022, jumping along with oil prices as supply constraints for crude were exacerbated by Russia's invasion of Ukraine.
But energy shares along with crude prices and other commodities have tumbled in recent weeks on concerns that a recession would sap demand.
A recession also stands to weigh on bank stocks, with a slowing economy hurting loan growth and increasing credit losses. Financial shares represent nearly 19 per cent of the value index.
An earnings beat from Citigroup, however, buoyed bank shares on Friday, with the S&P 500 banks index gaining 5.76 per cent.
At the same time, tech and other growth companies also tend to have businesses that are less cyclical and more likely able to weather a broad economic slowdown.
"People pay a premium for growth stocks when growth is scarce," said Burns McKinney, portfolio manager at NFJ Investment Group.
JP Morgan analysts earlier this week wrote they believe growth stocks have a "tactical opportunity" to make up lost ground, citing cheaper valuations after this year's sharp sell-off as one of the reasons.
Value stock proponents cite many reasons for the investing style to continue its run.
Growth stocks are still more expensive than value shares on a historical basis, with the Russell 1000 growth index trading at a 65 per cent premium to its value counterpart, compared with a 35 per cent premium over the past 20 years, according to Refinitiv Datastream.
Meanwhile, earnings per share for value companies are expected to rise 15.6 per cent this year, more than twice the rate of growth companies, Credit Suisse estimates.
If I had to pick one, I'd still pick value over growth. But that conviction has come down since the start of the year
Josh Kutin,
head of asset allocation, Columbia Threadneedle
Data from UBS Global Wealth Management on Thursday showed value stocks tend to outperform growth stocks when inflation is running above 3 per cent — around a third of the 9.1 per cent annual growth US consumer prices registered in June.
Josh Kutin, head of asset allocation, North America at Columbia Threadneedle, believes a possible US recession in the next year would be a mild one, leaving economically sensitive value stocks primed to outperform if growth picks up.
"If I had to pick one, I'd still pick value over growth," he said. "But that conviction has come down since the start of the year," Mr Kutin said.
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Power: 254hp
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How to keep control of your emotions
If your investment decisions are being dictated by emotions such as fear, greed, hope, frustration and boredom, it is time for a rethink, Chris Beauchamp, chief market analyst at online trading platform IG, says.
Greed
Greedy investors trade beyond their means, open more positions than usual or hold on to positions too long to chase an even greater gain. “All too often, they incur a heavy loss and may even wipe out the profit already made.
Tip: Ignore the short-term hype, noise and froth and invest for the long-term plan, based on sound fundamentals.
Fear
The risk of making a loss can cloud decision-making. “This can cause you to close out a position too early, or miss out on a profit by being too afraid to open a trade,” he says.
Tip: Start with a plan, and stick to it. For added security, consider placing stops to reduce any losses and limits to lock in profits.
Hope
While all traders need hope to start trading, excessive optimism can backfire. Too many traders hold on to a losing trade because they believe that it will reverse its trend and become profitable.
Tip: Set realistic goals. Be happy with what you have earned, rather than frustrated by what you could have earned.
Frustration
Traders can get annoyed when the markets have behaved in unexpected ways and generates losses or fails to deliver anticipated gains.
Tip: Accept in advance that asset price movements are completely unpredictable and you will suffer losses at some point. These can be managed, say, by attaching stops and limits to your trades.
Boredom
Too many investors buy and sell because they want something to do. They are trading as entertainment, rather than in the hope of making money. As well as making bad decisions, the extra dealing charges eat into returns.
Tip: Open an online demo account and get your thrills without risking real money.
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How being social media savvy can improve your well being
Next time when procastinating online remember that you can save thousands on paying for a personal trainer and a gym membership simply by watching YouTube videos and keeping up with the latest health tips and trends.
As social media apps are becoming more and more consumed by health experts and nutritionists who are using it to awareness and encourage patients to engage in physical activity.
Elizabeth Watson, a personal trainer from Stay Fit gym in Abu Dhabi suggests that “individuals can use social media as a means of keeping fit, there are a lot of great exercises you can do and train from experts at home just by watching videos on YouTube”.
Norlyn Torrena, a clinical nutritionist from Burjeel Hospital advises her clients to be more technologically active “most of my clients are so engaged with their phones that I advise them to download applications that offer health related services”.
Torrena said that “most people believe that dieting and keeping fit is boring”.
However, by using social media apps keeping fit means that people are “modern and are kept up to date with the latest heath tips and trends”.
“It can be a guide to a healthy lifestyle and exercise if used in the correct way, so I really encourage my clients to download health applications” said Mrs Torrena.
People can also connect with each other and exchange “tips and notes, it’s extremely healthy and fun”.
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Name: Kumulus Water
Started: 2021
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Based: Tunisia
Sector: Water technology
Number of staff: 22
Investment raised: $4 million
The burning issue
The internal combustion engine is facing a watershed moment – major manufacturer Volvo is to stop producing petroleum-powered vehicles by 2021 and countries in Europe, including the UK, have vowed to ban their sale before 2040. The National takes a look at the story of one of the most successful technologies of the last 100 years and how it has impacted life in the UAE.
Read part four: an affection for classic cars lives on
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1) The liquid nanoclay is a mixture of water and clay that aims to convert desert land to fertile ground
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4) The cost of treatment per hectare (2.4 acres) of desert varies from $7,000 to $10,000 per hectare
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About Takalam
Date started: early 2020
Founders: Khawla Hammad and Inas Abu Shashieh
Based: Abu Dhabi
Sector: HealthTech and wellness
Number of staff: 4
Funding to date: Bootstrapped
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Zayed Sustainability Prize
