Veteran investor and former Pimco fund manager Bill Gross says the surge in growth stock performance is tied to interest rates and, if they rise, value will be poised to outpace growth once again. This according to an article in CityWire.
Gross shared this insight in his first published investment outlook since retiring from fund management in March of 2019. He reportedly argues that “Treasury Inflation-Protected Securities (TIPS) yields are going higher, and that means value stocks are set to outpace their growth counterparts.”
According to Gross, low interest rates for the past decade combined with a steady growth rate led to a surge in the price of growth stocks, and since real interest rates must rise from their extreme current lows, value stocks will once again have the opportunity to shine.
He uses the Gordon Growth Model (a dividend discount model) to support his argument:
Price or Fair Value = dividend or cash flow / (discount rate – growth rate)
According to the formula, the smaller the denominator – either from a decreasing discount rate, an increasing growth rate, or both – the higher the fair value of the stock.
The article reports that other investors have also noted how higher rates benefit value stocks: “ The higher growth that usually goes with higher rates often means there is more demand for commodities like oil, and energy is a large part of value indices. Higher rates and a positively sloping yield curve also benefit banks and financials, another large component of value indices.”