Interest rates are coming for growth stocks

It appears that 2022 might finally be the year investors choose value stocks over big tech.

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Easy money and low rates benefit long-duration assets versus short-duration ones, said Peter Hardy, senior client portfolio manager with American Century Investments in Kansas City, Mo.

“Everybody understands it from a fixed income perspective: when interest rates fall, 30-year bonds do better than one-year bonds. And when interest rates rise, the opposite occurs,” Hardy said in a Jan. 31 interview.

It’s less well understood when it comes to equities, he said, but that’s what’s happened in markets so far this year.

“Growth stocks tend to be longer duration than value stocks,” Hardy said.

“Tesla is more like a 30-year bond — maybe even more like a 100-year one — while GM is more like a five-year bond. From an asset valuation perspective, value should benefit versus growth in a rising rate environment.”

He also pointed to the valuation disparity between growth and value styles, which is historically wide. Investors are paying more for growth stocks than they typically would, which makes the interest rate sensitivity of growth stocks even higher, he said. As a value manager, Hardy is hopeful this results in value outperforming. 

“Growth has outperformed value for over a decade, so value is due,” he said.

Further, Hardy said inflation benefits value stocks. Sectors like financials, energy and materials all see their earnings go up in inflationary periods.

His biggest overweights at the moment are in consumer staples, utilities and select health-care names. “These three areas have all had flat returns over the last year and we believe the market’s disregard for them has created compelling valuation opportunities,” he said.

For now, Hardy said he’s avoiding consumer discretionary, communication services and real estate, sectors where companies may have high debt levels or low cash flow.

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.