Most market analysts are expecting the momentum to shift towards ‘quality’ and ‘growth’ stocks in 2024 after the outperformance of ‘value’ stocks over the past three years.
‘Value’ stocks are generally well-established companies with steady profits that are trading at a discount to what they are intrinsically worth.
Companies in sectors such as commodities, industrials, commercial vehicles and public sector units (PSUs) fall in this bracket.
Stocks that consistently generate high return on equity (RoE) and have low cyclicality are considered ‘growth’ stocks.
'Quality’ is similar to growth except that here investors take a more conservative approach.
Most fund managers have a tilt towards any one of the stock-selection approaches.
The brighter outlook for quality or growth vis-a-vis value emanates primarily from expectations of a reversal in rate cycle in 2024 and a decline in valuation differential in the two segments.
“A successful soft landing driving rate cuts without any big growth disappointments is a possible consensus.
"This may favour ‘growth’ as an investment style,” said CLSA India in its 2024 equity outlook.
"Growth stocks may do better this year.
"The value index is trading at a significant premium to its last five-year average and valuations are at par with the long-term average,” said Ajay Tyagi, head of equities, UTI Asset Management Company (AMC).
According to Nuvama Institutional Equities, the expected moderation in profit growth in 2024 will also favour quality.
“With profit growth likely to moderate in 2024, rate cuts will boost valuations of cash cows/quality rather than cyclicals/value.
"This is given the lower earnings risks in the former.
"Besides, a valuation gap between the two has compressed significantly,” the brokerage said.
Aditya Birla Sun Life AMC also sees growth and quality doing better this year with expectations of money moving out of value stocks and flowing into quality shares.
Experts take varied approaches to study the performance of the two investing styles. Indices like the Nifty 50 Value 20 and Nifty 100 Quality 30 also give a broader idea.
Since January 2021, the value index has gone up 74 per cent, while the quality index is up 54 per cent, shows data from the National Stock Exchange (NSE).
At present, the quality index is dominated by sectors like fast-moving consumer goods (FMCG), information technology (IT) and automobiles.
They have a combined weight of over 67 per cent.
In the case of value, the top-three sectors include IT, financial services and FMCG.
They together constitute over 70 per cent of the index.
At the end of December, the value index had a price-to-earnings ratio of 18.54 vis-a-vis 31.24 of the quality index.
However, there is one risk to this view.
According to CLSA, a recession in the US can lead to concerns for growth stocks.
‘Value’ stocks' outperformance came almost after a decade-long underperformance.
The resultant valuation gap and a broad-based recovery, post the Covid lows, were some of the factors that led to their improved performance.
According to Nuvama, performance of the primary investment styles is also linked to the overall business cycle.
The present period, when the monetary tightening is complete, has generally favoured quality.
“In this phase, the lagged impact of monetary tightening starts to trickle down into the economy, impacting earnings.
"Central banks also start cutting rates but lag the growth cycle.
"It is only when they have cut rates enough and valuations have weakened that markets take comfort.
"In such a phase, there is a shift back towards quality as their earnings generally prove to be more resilient,” it noted.
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