updated on 5 Jan 2017
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Value stocks are preferred then Growth stocks
Value stocks are those which trades at lower price-earnings (PE) multiples with average earnings growth prospect, while growth stocks trade at higher PE and better earnings growth visibility . In a bull market, the initial rally is driven by growth stocks.
Value' stocks are gaining prominence over `growth' stocks in the portfolio of institutional investors amid rising uncertainties about earnings in the domestic market and hardening yields globally .
The weights of value sectors such as energy , metal & mining, utilities and banks in their portfolios are rising, while allocation to sectors including consumer staples & discretionary , and building materials are shrinking.
Value stocks have outperformed growth stock in the benchmark Nifty index by a wide margin in 2016. The average return of 20 value stocks was 20.4% compared w i t h 3 . 5 % fo r growth stocks in the Nifty according to Bloomberg data.
The Nifty gained 2.3% during the period.
Value stocks in the sectors including energy , mining and metals trade on average at 12.7 times their one-year forward earnings, which is 20% discount to the Nifty's valuation.
On the other hand, growth stocks trade at 20-25% premium to the Nifty's valuation despite recent drop in their prices. The Nifty trades at 15.2 times FY18 earnings, a 12% premium to its long-term average.
Three factors are driving value stocks up.
First, the possibility of better earnings growth seems to be higher for value stocks due to favourable interest rate cycle in the domestic market and an uptick in the commodity cycle in global markets.
Second, valuations of growth stocks improved due to greater global liquidity .
However, as yields in the developed markets harden, the pace of fund flow may wane. This will affect valuations of growth stocks.
and third one - several value stocks such as ONGC, PowerGrid, BPCL, NTPC and Coal India look reasonably valued since they trade closer to their long-term average.
For instance, PowerGrid is trades at 10.5 times the FY18 projected earnings compared with its 10-year average of 11.4. These factors are likely to keep the momentum high for value stocks in the near term.