The battle between ‘growth’ and ‘value’ stocks has captivated investors for much of the past century. Yet over the past decade it has become a decidedly one-sided fixture. Growth stocks have massively outperformed, and this has accelerated during the COVID-19 crisis.
This explains why the US S&P 500 and NASDAQ indices, which heavily feature growth stocks in the healthcare and technology sectors, have so drastically outperformed the relatively value-dominated UK FTSE All-Share Index.
The upshot of this remarkable divergence is that it would appear that it has never been more expensive to choose growth over value than it is today; even adjusting for differences in profitability levels and a low discount rate environment. This raises a critically important dilemma for investors. Should we tilt our portfolios towards growth stocks, assuming that the superiority of growth is here to stay? Or has the time finally come for value, with the relative expensiveness of growth having become so stretched that a sharp snapback is inevitable?