In this webcast, Jeremy Grantham, Ben Inker, and Simon Harris discuss recent market volatility and provide an update on the opportunity the wide spread in valuations between Value and Growth stocks still presents. While Value has had a strong year relative to Growth, our analysis indicates that considerable potential remains.
- The bubble has not finished losing air, and further declines could take a couple of years to play out. High valuations are widespread across equities, bonds, housing, and commodities.
- The group that has been far and away the most painful for investors has been “growth traps” – Growth stocks that disappoint relative to analysts’ forecasts. Even against the backdrop of lousy overall returns for Growth since last summer, growth traps have managed to underperform the broad Growth universe by their largest margin for any comparable period in history.
- We believe the Equity Dislocation opportunity is still incredibly strong. The chart below shows the valuation of U.S. Value stocks relative to U.S. Growth stocks through history; it is normalized such that 1 is fair value. GMO launched the Equity Dislocation Strategy in October 2020 to exploit the bubble in Growth stocks. At that time, U.S. Value was at 53% of fair value, 2nd percentile relative to history. The only time Value had been more attractive relative to Growth was the height of the tech bubble. While the Value/Growth spread has reverted since then, we believe considerable potential remains. As of May 31, 2022, this metric stood at 75% of fair value, 11th percentile vs. history. If relative valuations revert to long-term average levels, a long global Value, short global Growth portfolio could generate strong absolute returns from here.
value is Extremely Cheap
As of 5/31/2022 | Source: GMO
Composite Valuation Measure is composed of price/sales, prices/gross profit, price/book, and price/economic book. Value and Growth groups are both sliced over 12 months.
- As the opportunity set evolves, the Strategy will capitalize on rebalancing opportunities to focus on the valuation extremes across global markets.
- Clients have implemented this Strategy both as a hedge for venture capital and Growth equity exposure as well as a compelling stand-alone return opportunity.
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