Value stocks have outperformed growth stocks in the current financial year after years of underperformance.
Value strategy started to gain major traction since October last year as smallcaps, midcaps, PSU stocks, utilities, metals, and corporate banks started to outperform.
Value stocks have outperformed growth stocks in the current financial year after years of underperformance, but still, the gap between value and growth remains at a two-decade high, said ICICI Securities in a recent note. Now with value stocks maintaining their uptrend even amid rising volatility and surging bond yields, the brokerage firm believes value rotation is likely to continue going forward. “In a typical risk-off environment the trend should have reversed as seen earlier short spurts of beta rallies in the past,” the report said.
Value stocks going strong since October
Value strategy started to gain major traction since October last year as smallcaps, midcaps, PSU stocks, utilities, metals, and corporate banks started to outperform. Even on a global scale, the MSCI Value index has outperformed gaining 23% against a 10% jump in MSCI Growth.
Fundamental, ICICI Securities said, value rotation is being triggered by cyclical reversion of a decadal underperformance to growth as valuation gap peaked amidst the global bull rally. To add to this, the commodity upturn, government focus on Capex, manufacturing, and disinvestment aid the outperformance of value stocks. The improving economic outlook and accommodative stance of major central banks too add to the momentum.
Valuations might still be attractive
At this juncture, a significant number of sectors still have a negative P/B Z-score, despite the sharp run-up in markets. ICICI Securities added that 51% of the NSE 200 universe has a negative ‘Z-score’ on P/B ratio. In 2007 this stood at 20% while in 2010 the same was at 40%. “Negative Z-score indicates lower-than-average valuations for a stock compared to its long-term history,” the report said.
Buy these stocks
“Stocks with negative P/B Z-score and robust fundamentals are the best bets in an environment of ‘value rotation’ and economic growth revival,” analysts at ICICI Securities said. Among the NSE 200 universe, the brokerage firm has SBI, Axis Bank, PFC, and Federal Bank as its top picks among financials. While L&T, Ambuja Cement, and ACC are the top bets in the industrial space. Among oil & gas stocks GAIL is the only picks while NTPC and CESC are top utility stocks to buy. Further ICICI Securities has picked Tata Motors, Bajaj Auto, and Motherson Sumi among auto sector stocks and Cipla and Sun Pharma among pharmaceutical companies.
(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)