With some once-in-a-lifetime events unfolding at present, the question of value versus growth orientation captures much of the investors’ attention. Yet, is it really the right question, and don’t we give in on some psychological principles?
Over the past decade or so, growth investment opportunities have been driving ever-easier access to markets and information. This has resulted in a massive surge in passive investment opportunities mainly through index fund investing capturing the potential of long-duration stocks.
Until February 2020, investors couldn’t go wrong by allocating their assets to growth opportunities. Investors that decided to diversify their allocation were underperforming the market big time. Investors seeking growth opportunities, even with very little diversification, were never really wrong; whatever they did, it was a one-way winning ticket for about 10 years. It didn’t really matter in which best-case scenario you selected these opportunities; the chances were good that these investments would rise with the tide which was faster than the average diversified portfolio.
Today, though, investors appear to be frightened to even look at the shadow of growth opportunities. Value-oriented companies regained investors’ attention on the back of their past appeal of security and steadfastness. Historically, the shift from value to growth and from growth to value was a lasting process; once the process was in place, the trend lasted for about a decade. Today it occurs in a relatively fast manner. Yet the question remains: is the present rotation an outlier or is it really a true game-changer that will last? Here is our opinion.
While nothing lasts forever, growth stocks have proved the opposite. They have outperformed nearly any other asset allocation class throughout many economic cycles.
The essence of every company is to reinvigorate its workflow to become leaner, better, more efficient, and more profitable. Technological disruptions enabled structural shifts multiple times in the past. In normal cases, they resulted in a better standard of living, better remuneration, and a higher than average life expectancy. These occurrences occurred on the backs of accommodative policies.
Whatever economic scenario is going to prevail in the future, we believe that the growth supportive trend is well entrenched; be it because industries have moved forward to economy 4.0, be it because the baby boomers are about to reach retirement, be it because we all have tasted how easy consumption has become. So, why should there be any value companies in the market? Remember, sectors that were traditionally mostly valued, i.e., Financials and Healthcare, now lean and resemble more towards growth, as of now.
Some investment houses argue that value stock experience is their comeback because of their pent-up market and that potential is outnumbering the one for growth opportunities. It is also argued that long-duration stocks will get hammered further by rising capital costs and that the risk concept of investors has suddenly changed. Maybe!
“Maybe”. That’s the keyword here. We believe that the new consumer, particularly those in Gen Z, are spending more time online, are better versed in comparing ideas and opportunities, and are tempted to explore new things. Given this, they are less loyal to companies and their products than the previous generations. This new trend is enabled by means offered through metaverse which is pushing the frontier of the consumer experience multiple steps forward.
Yet again, I am tempted to argue how a pure value company can stay up with new consumer behavior. New consumers are looking to interactive digital space, and if the company evolves in this sphere, then inevitably the latter goes along with a growth model.
We are not, by any means, saying that every single company needs to evolve into this segment. Historically, not all professions have gone ahead in the evolution of the time. Think about how violins or high-end footwear or timepieces are assembled – even with the most modern technologies, the art remains with mostly traditional manual manufacturing! The company’s future is failsafe because of the particular know-how and the absolute finesse manual labor brings to the product.
Oddly, investing in value stock is putting assets to work for something in between; in absolute comparison, it would be like competing in an F1 with a 2CV equipped with Ferrari engine – this doesn’t pass the smell test. Companies that try these kinds of business models are not failsafe because they do a little of everything, thereby most likely not mastering the process as perfectly as either model could do.
That things are changing is apparent. The fashion industry is being lured into the $176 billion gaming industry, which attracts more than three billion players globally each year. The gaming industry is more than ever an extension of the real world where users can dress their avatars in exclusive products. That involvement then translates, via platforms such as Instagram and Snapchat, into a real-time online shopping experience. As of now, this appears to be just the tipping point of the new area waiting for us.
For value companies, the metaverse experience is like sand in the engine. Investors should be aware that the timeline for value companies is approaching fast. As a result, we would expect that ever fewer companies will qualify as value, and the rotation into fake value could probably be a stuck for future underperformance.
While the market has corrected for now, it is more than ever time to engage with growth opportunities as we believe that growth investment opportunities can be reached by deep fundamental research.