Value stocks priced for more outperformance

After years of underperformance, value stocks finally outshone their expensive growth counterparts in 2022. In fact, value stocks have just enjoyed their strongest 12-month period relative to growth in 21 years, according to Ben Inker of GMO, the fund giant founded by renowned investor Jeremy Grantham.

This trend is unlikely to end any time soon, says Inker.

Value stocks didn’t actually make money in 2022 – it’s more that growth stocks suffered an annus horribilis.

Importantly, the most expensive US growth stocks still look pricey relative to the rest of the market. They peaked out trading around four times the valuation of the average company, says Inker, and are now trading around three times – “still one of the more extreme valuations of the last 40 years”.

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Relative to history, the valuation differential between growth and value stocks remains marked in every region of the world, particularly in Europe. GMO’s conclusion: buy value, keep avoiding growth.

Even after a good run, value is “still priced for significant outperformance everywhere”.