Why Value Stocks, Lagging This Year, Should Overtake Growth Stocks

Growth stocks have long ruled, but they took a pasting in bear market 2022, as tech shares’ appeal fell victim to rising interest rates. But now, with rate hikes expected to abate, growth stocks are back on top. Value stocks, which had a moment of relative superiority last year (meaning minimal losses) are back in their customary lagging position.

Not for long, according to investment firm Franklin Templeton. “Value stocks spent over a decade in the wilderness,” a recent company blog post noted. “But after a rebound in 2022, we believe the style is on track for a multi-year resurgence.”

The trajectory of both styles is best seen by comparing two exchange-traded funds that institutional investors use often, employing data from research outfit Morningstar Direct. The SPDR Portfolio S&P 500 Growth ETF averaged 13.2% annually over the past 10 years, versus the SPDR Portfolio S&P 500 Value ETF’s 9.8%. But last year, the growth fund tumbled 29.4%, while its value counterpart dipped just 5.3%.

So far in 2023, the old pattern has resumed: The growth ETF has advanced 8.5%, and the value one is up only 5.3%. Much of value’s laggard behavior is due to worries about regional lenders in the wake of Silicon Valley Bank’s and Signature Bank’s collapse. Financials are a key component of value.

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To Franklin Templeton, value’s thriftier multiples are one factor that will help it overcome growth’s lead: At the end of March, the trailing price/earnings ratio for the MSCI World Value Index was about 13.5 times, compared with 31 times for the MSCI World Growth Index, the blog post said. The growth index has expanded “dramatically over the past decade, while the multiple for value stocks has barely budged,” the firm observed.

While the interest rate spiral appears to be near its end, it’s widely expected that rates will stay at their current level for some time. That, in Franklin Templeton’s estimation, will continue to wear away at growth stocks, in particular tech names, whose earnings and cash flows are booked years into the future. That means their profits are discounted at a higher level, lowering their present value.

Globally, there are rich value opportunities outside the U.S., where indexes are more tilted toward tech, the firm reasoned. “The makeup of the European market is also more heavily skewed toward value stocks, creating a richer hunting ground for opportunities,” Franklin Templeton contended. Upcoming infrastructure buildouts will boost value stocks even more, it added.

“The growing need for improved defense capabilities, liquified natural gas plants, windmills and semiconductor factories are all positive for value stocks, in our view,” Franklin Templeton stated.

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Tags: Bear Market, Earnings, exchange-traded funds, Franklin Templeton Investments, growth, Infrastructure, multiples, tech stocks, value

Kansas Governor Laura Kelly has allowed a bill to become law that will prevent the state government, its pension funds and its school districts from using environmental, social and governance principles when investing their funds or awarding contracts. Kelly, a Democrat, declined to sign the bill but chose not to veto it, allowing its implementation.

“Because I have reservations about the potential unforeseen consequences of House Bill 2100 for the state and for local governments, I will allow the bill to become law without my signature,” Kelly said in a statement.

During the current legislative section, Kelly has vetoed 15 bills, the most in Kansas history. The Republican-controlled Kansas House of Representatives and Kansas Senate attempted multiple override votes this week, which concludes the session. The next Kansas legislative session is scheduled for January 2024.

House Bill 2100, which will become effective July 1, prohibits state entities in Kansas from “giving preferential treatment to or discriminating against companies based on environmental, social and governance criteria in procuring or letting contracts.” The law also prohibits “any action taken or factor considered by a fiduciary with any purpose whatsoever to further social, political or ideological interests.” It also restricts state agencies from “adopting environmental, social and governance criteria or requiring any person or business to operate in accordance with such criteria.”

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According to the law, a fiduciary may be determined to have taken an action or considered a factor to “further social, political or ideological interests” based on “evidence” such as portfolio company engagement “beyond what controlling federal or state law requires, specifically on assets managed on behalf of the system.”

This includes prohibiting company engagement that involves:

Eliminating, reducing, offsetting or disclosing greenhouse gas emissions;
Instituting or assessing corporate board, employment, composition, compensation or disclosure criteria;
Divesting from, limiting investment in or limiting the activities or investments of any company for failing or not committing to meet environmental standards or disclosures;
Accessing abortion, sex or gender change or transgender surgery; and
Divesting from, limiting investment in or limiting the activities or investments of any company that “engages in, facilitates or supports the manufacture, import, distribution, marketing, advertising, sale or lawful use of firearms, ammunition or component parts and accessories of firearms or ammunition.”

Although Kelly said she has “reservations” about the new law, Kansas State Treasurer Steven Johnson, a Republican, voiced his support for it.

“This bill will ensure that public dollars—particularly our state pension fund—are invested in ways that produce the highest possible returns with the lowest acceptable risk, and that public contracts are awarded to the entities best-qualified to fulfill them,” Johnson said in a statement. “There is a broad consensus that so-called environmental, social or governance (ESG) criteria should not take the place of traditional fiduciary principles in decisions about how taxpayer dollars are spent and invested.”

Kansas Attorney General Kris Kobach, a Republican who lost to Kelly in the 2018 gubernatorial election and was one of the drafters of the original ESG investment bill, also endorsed the new law.

“This is a great victory in protecting the nest eggs of Kansas teachers, police, and other state employees who deserve to have their retirement savings invested based on the best return on investment instead of to advance any one political agenda,” Kobach said in a statement. “The next step will be to protect private investors from unknowingly having their returns diminished by ESG investment strategies being used without their knowledge.”