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There are many ways to categorize the global equity market—by geography, economic sector or industry, size, or by rating them on various environmental, social and governance categories (aka ESG), to name a few. But one other that is increasingly in focus this year is style—growth versus value. This year, style is a key differentiator in markets. Through 2020’s first three quarters, global growth stocks are up 18.9% while value stocks are down -14.6%—with growth leading before the winter’s bear market, during the bear market and subsequently. Some see this as a sign that value is set to rebound. Others claim that style is permanently impaired. But in Fisher Investments’ view, all categories have their day in the sun—and rain. While we suspect growth will continue leading for the foreseeable future, that doesn’t mean value won’t get its turn.There are many ways to categorize the global equity market—by geography, economic sector or industry, size, or by rating them on various environmental, social and governance categories (aka ESG), to name a few. But one other that is increasingly in focus this year is style—growth versus value. This year, style is a key differentiator in markets. Through 2020’s first three quarters, global growth stocks are up 18.9% while value stocks are down -14.6%—with growth leading before the winter’s bear market, during the bear market and subsequently. Some see this as a sign that value is set to rebound. Others claim that style is permanently impaired. But in Fisher Investments’ view, all categories have their day in the sun—and rain. While we suspect growth will continue leading for the foreseeable future, that doesn’t mean value won’t get its turn.

Unlike some categories like geography, value and growth aren’t easy to neatly define and delineate. Generally speaking, value stocks tend to have lower valuations like price-to-earnings or price-to-sales ratios, while growth stocks have higher valuations. Value stocks tend to return profits to shareholders through dividends or buybacks; growth stocks tend to reinvest excess profits into the business—generating growth. Value stocks also tend to be more credit-reliant and economically sensitive, while growth stocks tend to cluster in areas that see long-lasting demand trends that don’t sway as much with the overall economy.

For an easy way to help visualize this, consider the sectors that dominate global growth and value stocks. (See Exhibit 1.)

Exhibit 1: Sector Breakdown of MSCI World Growth and Value Indexes

Source: FactSet, as of 10/14/2020.

As you can see, value stocks dominate the Financials, Utilities, Energy and Industrials sectors. By contrast, growth has much more Information Technology exposure, as well as more exposure to Communication Services and Consumer Discretionary stocks.

But sectors do not align neatly into these categories. Index providers assign a “growth” and “value” weight to them. Some are 100% one or the other. Some are 50% growth and 50% value. Others, 65% growth, 35% value—and so on. As we noted, these distinctions are muddier than other categorizations. In some ways, we think of them as “growthier” and “valuish” more than statements drawing bright lines.

However, a review of market history since MSCI’s growth and value data begin in 1974 shows these styles frequently trade leadership stints. Exhibit 2 plots the difference between rolling 12-month MSCI World Growth Index returns and MSCI World Value Index returns.

Exhibit 2: Growth and Value Leadership Shifts

Source: FactSet, as of 10/14/2020. MSCI World Growth and Value Indexes with net dividends, 12/31/1974–09/30/2020.

Exhibit 3 plots the same thing over a longer, rolling 36-month period to illustrate broader leadership trends.

Exhibit 3: Growth and Value Leadership Shifts, Rolling 36-Month Returns

Source: FactSet, as of 10/14/2020. MSCI World Growth and Value Indexes with net dividends, 12/31/1974–09/30/2020.

Fundamentally, value stocks’ tendency to cluster in more economically sensitive areas would typically favor them in an early bull market, as markets anticipate a return to economic growth benefiting the category. But this time, it is the reverse. Growth stocks have led. Fisher Investments’ analysts think there are several causes: For one, Energy faces stiff headwinds from an oversupplied oil market relative to lockdown-hamstrung demand. Financials also face headwinds as a narrow gap between short-term yields (a proxy for their funding costs) and long-term yields (a proxy for loan revenue) hits profits. This same factor likely makes them less willing to lend to other, credit-intensive firms in the Utilities and Industrials sectors. In our view, these factors—plus growth stocks’ concentration is areas like Tech that are well-positioned in the COVID era—explain why we expect growth to continue leading.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[i] Source: FactSet, as of 10/14/2020. MSCI World Growth Index and Value Index returns with net dividends, 12/31/2019–09/30/2020.

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