Sunday, October 11, 2009

>Is growth back in fashion? (HSBC)

  • Prefer growth investing over value style; better valuation and superior earnings growth create a compelling proposition
  • At 1.3x relative PE, growth stocks are trading at the lowest valuation premium in five years
  • Analysts forecast superior earnings growth for growth vs value stocks
Growth stocks are trading at a relative valuation that is lower than their historical level. The growth index is currently at a 12-month forward PE of 20.4x, while the value index is at 15.8x. The valuation premium of growth stocks, at 1.3x, is in fact one standard deviation below its five-year average. Also, at a 12-month forward PE of 15.8x, value stocks are no longer cheap.

In India, as opposed to other markets, growth stocks have outperformed value stocks over the longer term. Their performance is also better on a risk-adjusted basis; the Sharpe ratio of the growth index is 0.109 vs 0.108 for the value index.

From March 1997 to June 2009, the EPS of growth stocks grew at a CAGR of 13.5% compared to 7.8% in the case of value stocks. In the last two years, the performance of growth stocks lagged that of value stocks, as EPS growth of the former lagged that of the latter. Looking ahead, analysts forecast a turnaround, marked by growth stocks growing earnings at a CAGR of 22.5% versus value stocks at 17.5% over FY2010-12e.

A turnaround in earnings, stronger growth, and lower relative valuation make a compelling case for growth stocks. We recommend investing in growth stocks over value stocks.

From within HSBC’s coverage universe, we highlight growth stocks rated Overweight and value stocks rated Underweight. Some of the Overweight growth stocks are ITC, HDFC Bank and BHEL, while an Underweight value stock is Reliance Infrastructure.

To see full report: INDIA INSIGHTS