A robust body of literature has shown that value investing, or buying stocks that are “cheap” based on a variety of valuation metrics, outperform growth stocks over longer-time periods. However, growth stocks have now outperformed value stocks for a protracted period in both the U.S. and foreign markets.
Examining returns for foreign developed market stocks as of 12/31/20, over the last 10-years, growth has outperformed value by an astounding 4.1% per annum. Although, for the 3-months ending 12/31/20, value outperformed growth by over 6%, leading some to speculate that a new value stock cycle has begun.
All is not lost for the die hard value investors. When examining rolling 10-year monthly data since 1/1/75, the inception of both indexes, value stocks have outperformed growth stocks in 79% of the rolling 10-year periods.
What is interesting to note is that the ten worst rolling 10-year periods (the red slivers in the chart above) all occurred during 2020.
However, foreign growth stock valuations could be a major headwind to maintain their performance advantage.
On a relative basis, growth stock P/E multiples are about two standard deviations above average valuation levels. Once global economies begin to recover in the “post covid” world, growth stocks could experience an earnings recovery allowing growth stocks to retain their performance advantage in the short-run. Value investing across the globe has been a good bet historically, but allocators would be well advised to avoid the temptation to time style shifts in the market and maintain long-term style exposure that best fits their investment philosophy.