The recent surge in the Indian stock market, driven by expectations of political stability and policy continuity, has prompted many investors to reassess their investment strategies, particularly when choosing between value and growth stocks.
The debate between value and growth investing is long-standing, with each approach having a dedicated group of supporters.
Warren Buffett, Charlie Munger, and Benjamin Graham have always been known for their advocacy of value stocks. On the other hand, Jim Simons, Peter Lynch, Philip Fisher, Ron Baron, and Cathie Wood achieved remarkable success by identifying and investing in companies with strong growth potential.
Experts point out that growth and value are two distinct investment philosophies that represent contrasting approaches, each with its own set of merits and risks.
Value stocks are shares of companies that appear to be priced lower than their true worth. These companies usually have stable finances, steady earnings, and low valuation measures. Investors in value stocks look for bargains—stocks that are temporarily unpopular or ignored by the market, hoping their true value will eventually be recognised, leading to price increases. These investors are often conservative and prefer stable investments.
On the other hand, growth stocks are shares of companies expected to grow faster than average in the future. These companies reinvest their profits into things like research, market expansion, or acquisitions instead of paying dividends. Growth stocks usually have higher price-to-earnings (P/E) ratios because investors are willing to pay more for the promise of future growth. These investors are typically more willing to take risks for the chance of higher returns. Growth stocks can provide significant returns during strong market periods but may be more volatile.
Many investors use a mixed strategy, combining both value and growth stocks in their portfolios for diversification. This ensures the stability and income from value stocks and also helps them get high returns from growth stocks. Growth at a reasonable price (GARP) is a popular approach that blends these strategies.
Currently, the Indian stock market is teeming with positivity. Despite short-term volatility, expectations are high that the market will yield healthy returns in the medium to long term.
With both value and growth stocks appearing poised for growth, favouring one over the other is challenging. Mint consulted several experts to gather their opinions on which they prefer. Here’s what they said:
Growth stocks can deliver substantial returns during bull markets but may be more volatile.
Investors can adopt a blended strategy, incorporating both value and growth stocks in their portfolios for diversification.
This approach combines the stability and income generation of value stocks with the growth potential of growth stocks.
One such hybrid strategy that has become popular recently is growth at a reasonable price, or GARP.
Investment choices may shift occasionally based on prevailing market conditions and economic outlook.
During periods of economic uncertainty, investors might tilt towards value stocks for stability, while in bullish markets, they may favour growth stocks for capital appreciation.
There is no one-size-fits-all answer, and the final choice depends on an investor's financial goals, risk tolerance, and market outlook.
At times, we see growth stocks turning into value stocks (for example, IT services stocks now are good dividend plays and quote at a lower P/E than in earlier years).
Lately, we have also seen rail stocks that were earlier value stocks yielding good dividends and becoming growth stocks due to the government's focus on railway modernisation and expansion.
For Indian investors considering the medium term, focusing on growth stocks might be more advantageous.
India’s market is characterised by its youthful demographic and robust economic expansion, favouring growth-oriented investments.
Mid- and small-cap stocks often outperform large-cap stocks and exemplify this growth potential, offering significant capital appreciation.
Furthermore, India's higher P/E ratio than other emerging markets indicates strong investor confidence in future growth.
Despite the outperformance of the MSCI India Value index historically, India's economic environment and market dynamics suggest that growth stocks could offer superior returns in the medium term.
In the current market scenario, investors should remain cautious about investing in momentum or small-cap stocks, which have remained overheated over the past two years.
Any sustained period of sideways or downward movement in momentum stocks can trigger a sell-off.
Investors, therefore, should consider the risk involved before making such investments.
Having said that, a steep fall in the market without any structural change in the fundamentals must be regarded as an opportunity.
We believe that investors should capitalise on this opportunity for fresh equity investments.
Value and growth stocks are both important for an investor’s equity portfolio.
Unfortunately, there is no one-size-fits-all solution. A simplistic view would warrant a healthy blend of growth and value stocks, with the percentage allocation dependent on the investor's risk appetite.
However, with growth stocks showing tendencies of higher volatility in the short and medium term, adding an important factor of the investor's time horizon to the decision-making process would help them create a portfolio better suited to their profile.
India's economy is set to grow, driven by government initiatives in infrastructure, manufacturing, and the digital economy, which may benefit growth stocks.
Recent market trends and valuation levels indicate a mixed scenario, with some growth sectors appearing overvalued and traditional sectors offering undervalued opportunities.
For the medium term, we feel a balanced strategy could be wise. Investors might consider diversifying their portfolios to include value and growth stocks, helping to mitigate market volatility and take advantage of potential growth.
Due to the market's dynamic nature, it will be crucial to periodically review and adjust portfolios based on economic indicators and market conditions.
Investors must prefer safe value stocks over the medium term because there could be volatile times ahead.
Elections are done and dusted, but political uncertainty will likely remain at least for the first few months, as BJP leads a coalition government for the first time in 10 years under Narendra Modi's leadership.
Apart from this, there are elections in the UK and the US in July and November, respectively, which is also likely to add to the volatility at the global level.
Thus, we believe that value stocks from the FMCG, pharma and IT baskets would be preferred over high-growth stocks from the capital goods or engineering baskets.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
