Last year I introduced a new value screen in this column. The idea was to replace one focused on a market bete noir – Brexit – with a screen focused on another one – high valuations. However, over the past 12 months – albeit less so in the past few weeks – the market has stuck by its taste for higher-priced growth stocks in preference to value.
While the taste for growth is most conspicuous among US large caps, especially the attention fawned on the so-called FAANG stocks (Facebook, Apple, Amazon, Netflix and Alphabet’s Google), it has also been the general flavour of markets. The outperformance of the MSCI World Total Return Growth index versus the corresponding value index over one year illustrates the point (see 1-year chart below). The recent sharp drop-off in the growth index also illustrates why some market watchers are asking if the worm has turned. Meanwhile, the longevity of the trend (see 10-year chart below), which runs counter to prevailing financial orthodoxy, helps explain why many highly regarded investors fear that highly valued growth stocks could be set to come a cropper.
