Indian stock markets have surged recently on hopes of political stability and policy continuity, prompting many investors to re-examine their investment strategies, especially their selection of value and growth stocks.
The debate between value and growth investing has been going on for many years, with each approach having its own group of ardent advocates.
Warren Buffett, Charlie Munger and Benjamin Graham have always been known as advocates of value stocks, while Jim Simons, Peter Lynch, Philip Fisher, Ron Baron and Cathie Wood have all had remarkable success identifying and investing in companies with high growth potential.
Also read: 5 Important Value Investing Lessons We Can Learn From Warren Buffett
Experts point out that growth and value are two different investment philosophies that represent contrasting approaches, each with their own benefits and risks.
Value stocks are shares of companies that appear to be trading at a lower price than their true value. These companies usually have stable financials, steady earnings, and low valuation metrics. Value investors look for undervalued stocks, such as those that are temporarily out of favor or ignored by the market, in the hope that their true value will eventually be recognized and their price will rise. These investors tend to be conservative and prefer stable investments.
Also read: The eternal debate in factor investing: quality vs. value
Growth stocks, on the other hand, are stocks of companies that are expected to grow faster than average in the future. Instead of paying dividends, these companies reinvest their profits in research, market expansion, acquisitions, etc. Growth stocks usually have higher price-to-earnings (P/E) ratios because investors are willing to pay more for the prospect of future growth. These investors are usually willing to take on risk for the chance of higher returns. Growth stocks can offer large returns during strong market periods, but they can also be subject to greater volatility.
Many investors use a mixed strategy that combines both value and growth stocks to diversify their portfolio, ensuring stability and income from value stocks while also allowing for higher income from growth stocks. Growth at Fair Prices (GARP) is a popular approach that combines these strategies.
Currently, the Indian equity market is full of positive signs and despite short-term fluctuations, hopes are high that the market will deliver healthy gains in the medium to long term.
With both value and growth stocks showing signs of growth, it’s hard to favor one over the other. Mint consulted several experts to get their take on which is the favorite. Here’s what they had to say:
Deepak Jasani, Head of Retail Research, HDFC Securities
Growth stocks have the potential to deliver big gains in a bull market, but they can also be more volatile.
Investors can adopt a mixed strategy that incorporates both value and growth stocks to diversify their portfolio.
This approach combines the stability and income generation of value stocks with the growth potential of growth stocks.
One hybrid strategy that has become popular recently is Growth at a Fair Price (GARP).
Investment selections may change from time to time based on current market conditions and economic outlook.
In times of economic uncertainty, investors may lean toward value stocks in search of stability, but in a bull market they may favor growth stocks in search of capital appreciation.
There is no one-size-fits-all answer and the ultimate choice will depend on an investor’s financial goals, risk tolerance and market outlook.
Sometimes, a growth stock can turn into a value stock (for example, an IT services stock now has a higher dividend payout ratio and a lower price-to-earnings multiple than before).
Recently, with the government’s focus on modernizing and expanding the railways, we have seen some previously value railway stocks transform into high-yield, growth stocks.
Sunil Damania, Chief Investment Officer, MojoPMS
For Indian investors thinking in the medium term, a focus on growth stocks may be more advantageous.
The Indian market is characterised by a young demographic and strong economic growth, favouring growth-oriented investments.
Small and mid-cap stocks often outperform their larger counterparts, demonstrating the potential for growth and providing significant capital appreciation.
Moreover, India’s price-to-earnings ratio (P/E) is higher than other emerging markets, indicating investors have high confidence in future growth.
Despite the historical outperformance of the MSCI India Value Index, India’s economic environment and market trends suggest that growth stocks have the potential to deliver superior returns in the medium term.
Vaibhav Porwal, Co-founder, Dezerv
In the current market conditions, investors should remain cautious about investing in momentum and small-cap stocks, which have been overheated for the past two years.
If momentum stocks continue to trend sideways or down, selling pressure may intensify.
Investors should therefore consider the risks involved before making any such investment.
That being said, when markets drop sharply without any structural changes in fundamentals, they must be viewed as an opportunity.
We believe investors should take advantage of this new opportunity in equity investing.
Siddharath Arora, Director and Head of Product and Research, Equirus Wealth
Value and growth stocks are both important parts of an investor’s stock portfolio.
Unfortunately, there is no one-size-fits-all solution, and a simple approach would be to choose a balanced mix of growth and value stocks, depending on an investor’s risk tolerance.
However, growth stocks tend to be more volatile in the short and medium term, so adding an important element to the decision-making process – an investor’s time horizon – can help create a portfolio that is better suited to the investor’s profile.
Ajit Mishra, Senior Vice President, Research, Religare Broking
The Indian economy is expected to grow thanks to government efforts in infrastructure, manufacturing and the digital economy, which could benefit growth stocks.
Recent market trends and valuation levels point to a mixed scenario where some growth sectors are overvalued while traditional sectors offer undervalued opportunities.
In the medium term, a balanced strategy seems prudent: investors may consider diversifying their portfolios into value and growth stocks to mitigate market volatility and capitalize on growth potential.
Because markets are dynamic, it is important to regularly review and adjust your portfolio based on economic indicators and market conditions.
Also read: Expert opinion: Don’t try to time the market, expect value stocks to outperform, says Anand Rathi’s Sujan Hajra
Apurva Sheth, Head of Market Outlook and Research, SAMCO Securities
With volatile times ahead, investors should opt for safe value stocks in the medium term.
The election is over, but political uncertainty is likely to remain for at least the first few months as the BJP, under the leadership of Prime Minister Narendra Modi, heads a coalition government for the first time in a decade.
Add to this the fact that the UK and US will be holding elections in July and November respectively, which are also likely to increase volatility at a global level.
Hence, we believe value stocks in the FMCG, pharma and IT baskets will be preferred over high growth stocks in the capital goods and engineering baskets.
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Disclaimer: The views and recommendations expressed are those of the individual analysts, experts and brokerage firms and not of Mint. You are advised to consult a qualified professional before making any investment decisions.
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