MARK SEYMOUR: Equity market valuations matter in rising inflation environment

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Investors are nervous as corporate earnings are likely to weaken as central banks raise rates

The relative performance comparison between value stocks and growth stocks swings wildly from one period to the next. For example, the MSCI value index underperformed the MSCI growth index by 28% between the start of the Asian crisis and the height of the dot-com bubble .

Despite the wild swings in relative returns over the past 34 years the performance of value and growth stocks have been identical, suggesting that there is no significant superiority between the two strategies or styles of investing over the long term. More formally, the variables used to specify stocks for inclusion in the MSCI Global Value index are bThe following measures are used to specify stocks for inclusion in the MSCI Global Growth index:Current internal growth rate,The critical distinction between growth and value stocks is that price is a determining factor for classifying value stocks, whereas price is not a consideration for categorising growth stocks.

It would seem that when the market is trading at attractive valuations and macroeconomic conditions are favourable, investors are more comfortable and willing to buy stocks with attractive growth metrics, regardless of price. Conversely, when investors are nervous about unfavourable market valuations and macroeconomic conditions, they migrate to relatively cheaper market segments, resulting in better relative performance from “value” stocks.

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