Brokerages betting on value stocks for outperformance

Value-based investing style may give outsized returns, suggest mavens

A recent bout of underperformance for value-based stocks in India may be ending. Brokerages believe that companies which offer higher dividends, and are trading at a lower multiple of their earnings and book value; may begin to outperform their more expensive peers in the 'growth' basket. This would end a multi-year period of underperformance.

Phillip Capital noted in its 12th May India Strategy report that the MSCI India Value index has underperformed the MSCI India Growth index since the financial crises. The value index gave 300 basis points lower returns than the growth index.

The reason for the underperformance was falling economic output, high inflation and stalled projects. However, current indicators suggest a return to higher gains for value investors. Analysts Naveen Kulkarni, Anindya Bhowmik and Deepak Agarwal noted that the MSCI India Value index is trading at just 10.5 times its earnings one year from now while the growth index is at 18 times the same figure. The former is below its mean of 12, while the latter is above its mean of 17.

 

Earnings themselves are likely to change trajectory believe the trio.

"Expectations from growth stocks, with their sustained outperformance in the last five years, have led to consistent upward earnings revisions; in some sectors such as consumers, expectations are excessive. On the other hand, sustained underperformance of value stocks has led to consistent earnings downgrades. The scope for positive earnings surprises in growth stocks is now limited while a major improvement in the earnings trajectory of value stocks seems round the corner," said their report.

Ambit Capital's April 22nd 'Good and Clean Portfolio' report authored by analysts Gaurav Mehta, Karan Khanna and Saurabh Mukherjea too said value is a good bet now.

"Our assessment of the last two general elections suggests that 'value' stocks perform well as do small-caps and mid-caps in the 12 months after a general election. Furthermore, there is no reason to believe that investing in 'junk' (neither low RoCE nor high beta) systematically delivers after the elections," it said.

"We believe that the inflection point of value taking over growth is getting closer and that portfolio allocation should be progressively more inclined towards value... As we expect the onset of a capacity-creation phase, value investing will soon become the dominant investment strategy," added the Phillip Capital report.

The MSCI India Value index has outperformed the MSCI India Growth index since 1999.