To The Moon

This article gonna explain why the well-recognized indices and analysts believe the growth stocks will outperform the value stocks.

According to MSCI indices, Quality & Growth investing will continue to outperform Value.

Let's look at the three types MSCI indices.

Before we start, we need to know what MSCI World Index is: 

The MSCI World Index captures large and mid-cap representation across 23 Developed Markets (DM) countries. With 1,540 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

1. The MSCI World Growth Index

It captures large and mid cap securities exhibiting overall growth style characteristics across 23 Developed Markets (DM) countries.

Five variables are considered: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.

From this chart, we can tell that the growth companies outperform the broader market.

2. The MSCI World Quality Index

The index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage.

The quality stocks perform way better than the broader market in the past decade.

3. The MSCI World Value Index

It captures large and mid cap securities exhibiting overall value style characteristics across 23 Developed Markets (DM) countries.

The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.

Among the three indices, only the value stocks underperform the MSCI world index.

From this trend, we can detect the growth and quality stocks will continue to outperform the broader market in the future.

Analysts are also positive on the growth stocks for 2 reasons

1. fundamentals

Compared to value stocks, growth stocks have a weaker correlation with short-term fundamentals. Long-term fundamentals have a greater impact on growth stocks, such as industry trends, industry growth, and the competitive landscape of companies.

After the pandemic, the slope of economic recovery is the core concern of the market.

Growth stocks have a lower requirement for the slope of recovery, and as long as the pandemic and market sentiment recover, growth stocks will likely rise.

However, the rebound of value stocks has higher requirements on the slope of economic recovery, policy implementation and effect.

2. liquidity

Growth stocks are more sensitive to the liquidity environment.

Overseas liquidity uncertainty is being removed. The implied rate hike expectations for the year in FFR futures has fallen back since May, and US Treasuries have fallen from a high of 3.2%.

We think the Fed may slow down the pace of rate hikes in Q3 and stop raising rates in Q4. If we look at the six-month dimension, both rate hike and U.S. Treasury rates are falling back.

A major reversal in growth stocks may be starting

Both fundamentals and improved liquidity are more favorable to growth stocks, so the certainty of growth stocks rising is higher. Once market sentiment improves, a rally in growth stocks could open up a major trend reversal.

However, there are more influencing factors that restrict the rise of value stocks. In the short and medium term, it may continue the oscillating pattern, and may still need to wait for the opportunity of reversal.

Conclusion

Maybe it is counter-intuitive, growth stocks are still good choice in this market. But we shouldn't put all eggs in the growth basket. Rather, we can focus more on growth and quality stocks, and also buy some value stocks to hedge risks. 

$S&P 500(.SPX)$ $NASDAQ(.IXIC)$ $Coca-Cola(KO)$