Why value stocks are likely to outperform growth stocks in short term

Markets greeted the new financial year with high spirits as Nifty crossed the levels of 18,000. Though the rally failed to persist over the week, questions over the valuations of benchmark indices and investing in value stocks started doing the rounds as Nifty rebounded ~15% from the lows of March.

Over the past two years, markets have skyrocketed to new highs, with the MSCI Value index delivering ~90% and ~16% gains in FY21 and FY22, respectively, compared to the MSCI Growth index, which climbed ~56% and ~17%. This indicates a clear outperformance of the Value index over the previous two fiscals. Now, the real question for the market participants is which theme can dominate in FY23 – growth or value?

From where we stand today, interest rates have bottomed out and a slew of rate hikes await us. The rising inflation and interest rates will only lead to a spike in bond yields. In the past decade, there has been a positive correlation between bond yields and the performance of value stocks as during periods where the 10 year government security yield has risen, the MSCI Value Index has also rallied. Similarly, in periods of falling 10-year bond yields, the value index has largely declined. Further, the current macro-dynamics, especially the supply disruptions, the soaring inflation and the potential dent on demand can, to some extent, eat into the growth of companies.


Considering the robust recovery since the pandemic, high growth expectations have already been built in the stocks valuations. Even a minor miss in delivering on these expectations can result in a magnified impact on the stock price and lead to earnings downgrades. While the upcoming quarterly results will be critical in determining the trend that can dominate, the factors laid above suggest that value stocks are likely to outperform growth stocks, at least in the short term.

Event of the week
The consolidation in the Indian financial sector has just clinched a sequel. Unlike the first part which was directed by the public sector banks where the industry witnessed a series of mergers, this time however, it is the private sector players. On Monday, HDFC bank announced the merger with its parent entity HDFC Ltd with a rationale to enhance its housing loan portfolio, increase its customer base, and enable HDFC Ltd’s portfolio an access to the low cost of funds.

This news was announced while the echo of Axis bank acquiring the retail business of Citi was still audible. These mergers have a broader implication for the sector rather than merely increasing the competitive intensity. New players might find it difficult to sustain their momentum as offering higher interest rates on deposits may not be a sustainable option in the long run. Additionally, post RBI tightening the non-banking norms, NBFCs now face regulations almost at par with those of banks. These factors can further propel M&As in the financial services space.

Technical Outlook
Nifty 50 index closed on a positive note but faced strong rejection at 18,100 levels as selling pressure rose. The index has formed a shooting star candlestick pattern at channel resistance drawn from the all-time high, which hints at a bullish momentum slowdown. Similarly, US indices as well as European ones are establishing a lower top. Having said this, their short-term trend is still bullish. With this backdrop, we suggest traders maintain a mildly bullish outlook as long as the Nifty does not break below 17,600 levels. Immediate resistance is now placed at 18,100 levels.

Expectations of the week
While globally investors will be keenly monitoring inflation figures in the United States and China, Indian CPI print will be a key domestic factor to monitor. It is expected that the number will be north of RBI’s tolerance limit but a higher than anticipated spike in inflation can cause knee-jerk reactions.

Further, Indian IT companies will be in focus as the leaders will be reporting their Q4 results. While it is likely that revenue growth in IT businesses will soften sequentially, margins, revenue guidance, and attrition numbers will be crucial indicators to track. Given the macro factors and onset of earnings season, volatility will be elevated in the upcoming truncated week. Investors are therefore advised to invest in resilient stocks which have a reasonable risk-reward ratio. Nifty50 closed the week at 17,784.35 up by 0.64%.