Inflation and Interest Rate Fears... Value Stocks That Have Risen a Lot VS Growth Stocks That Have Fallen Too Much

Heungkuk Securities "Value Stocks Still Have Relatively High Attractiveness"

[Asia Economy Reporter Lee Seon-ae] If you are wondering whether to choose value stocks, which have risen relatively more due to the recent economic recovery phase, or growth stocks, which have declined due to concerns over inflation and rising interest rates, an analysis suggests that value stocks still have relatively higher attractiveness.

According to Heungkuk Securities on the 16th, the US Consumer Price Index (CPI) for April exceeded expectations, reigniting inflation concerns. The market is on high alert, and volatility has increased. Researcher Lim Seong-cheol of Heungkuk Securities said, "Inflation and rising interest rates supported by economic recovery may trigger short-term concerns, but they have acted as positive factors for the stock market in the long term," adding, "It is important to note that during periods of rising interest rates in recovery phases, the market has risen despite several adjustments."

Since 2001, over about 20 years, during 15 significant interest rate hike periods, the average return of the KOSPI was 18.6%, with an 80% probability of increase. Assuming interest rates continue to rise, it is judged that the stock market direction will ultimately be upward.

Typically, during inflationary periods, value stocks such as cyclical stocks rise, while growth stocks decline due to sensitivity to discount rates. This raises the dilemma of whether to buy the rising value stocks or the significantly fallen growth stocks. Regarding this, Researcher Lim said, "If you are torn between value and growth stocks, value stocks are still judged to have relatively higher attractiveness."

He emphasized that historically, during Korean market interest rate hike periods in 2001, 2003, 2005, 2007, 2009, 2013, and 2017, value stocks recorded better returns compared to growth stocks. Also, over the past 20 years, during interest rate hike periods, the average return and probability of increase for value stocks were 20.7% and 80.0%, respectively, outperforming growth stocks at 15.4% and 73.3%.

This year, value stocks are also expected to dominate in earnings. Based on operating profit, the expected year-over-year growth rates for value and growth stocks are 57.7% and 49.6%, respectively, and the 2021 earnings consensus changes also show value stocks performing better than growth stocks.

Meanwhile, reflecting the economic recovery, value stocks are rallying compared to growth stocks, raising concerns from a valuation perspective. As of early this year, value stocks recorded a 21.7% return, while growth stocks recorded -3.3%. Nonetheless, choosing value stocks is considered better.

Researcher Lim said, "Compared to the average returns of value stocks during past interest rate hike periods, value stocks are still at a low level, and from the perspective of relative valuation between value and growth stocks, value stocks remain significantly undervalued while earnings growth continues," emphasizing, "It is necessary to pay attention to stocks undervalued compared to the 5-year average 12-month forward price-to-book ratio (PBR)."

This content was produced with the assistance of AI translation services.