Growth versus value as an equity management style remains a basic topic of conversation among funds, managers and consultants. But “pure” growth or value can be hard to define in modest-sized markets like Canada – and even abroad, behaviour of growth and value stocks is far from highly correlated.
In this and future posts, we’ll delve into the sources of this divergence, but first let’s demonstrate its existence. Over the last three years, Canadian investors have become accustomed to hearing that value stocks are trumping growth. And so they have: value stocks surpassed growth by more than 23%.
Yet, if you were reading US publications, you’d draw the conclusion that the opposite was the case: US growth stocks have outperformed value by 19% over the past 3 years, while in Canada growth stocks have underperformed value stocks by 23% over the same period.
Broadening our scope to include other global markets, we find a picture that’s far from uniform. In fact, post-credit crisis Canada has the weakest relative performance by growth stocks in any of the major stock markets. Click image to enlarge.
Annualized returns, Source: MSCI country & regional indices
The chart demonstrates that Canada’s growth versus value behaviour decoupled from the US over the last 10 years. Concurrently, our market is starting to more-closely resemble other markets across the globe.
The second chart, below, demonstrates the shifting correlation. While the growth/value relative performance in Canada versus the US has a reasonably high 0.52 correlation over 30 years, the relationship has changed to a -0.04 correlation over the past 10 years.
Click image to enlarge.
Source: MSCI country & regional indices
We can make the following observations from this correlation data:
— Between 1982 and 2001, Canada’s growth/value correlation with the USA was at 0.60, but is effectively uncorrelated with the USA since then.
— Canada’s growth versus value performance relative to EAFE and Europe ex-UK remained consistent over the past 30 years.
— Canada transitioned over the 30-year period from being relatively uncorrelated to the UK and Australia to a much higher correlation in the past 10 years.
In further posts, I’ll explore the sources of divergence in Canadian equity growth/value style performance to the US and its convergence in performance to the UK and Australia.