Picking sides

Picking sides

There is no fixed formula when determining whether a growth or value investment strategy is better, writes Nuntawun Polkuamdee

Investors look at an electronic board displaying stock prices at a brokerage. Pornprom Satrabhaya
Investors look at an electronic board displaying stock prices at a brokerage. Pornprom Satrabhaya

In an uncertain market, investors may wonder whether growth or value stocks are a better bet, as each type has benefits to match varying circumstances.

To help investors decide, the Stock Exchange of Thailand (SET) sampled both groups of stocks, dubbing them SET-Growth and SET-Value, measuring their returns over the past decade to assess their performance.

According to the SET, a growth stock is one with high growth potential based on its share price, price-to-earnings (P/E) ratio and price-to-book (P/B) ratio, while it has a low dividend payment. A value stock is one with strong fundamentals, steady growth, a high dividend payout and a low share price.

Since the beginning of 2021, SET-Growth stocks have stood out because most of them benefitted from the lockdown, while SET-Value stocks, which are mostly in banking and energy, were heavily affected by the pandemic.

Since the beginning of 2021, stocks in SET-growth have become more prominent because most of them are stocks that benefit from the lockdown.


By selecting and categorising stocks in SET-Growth and SET-Value based on their P/E ratios, P/B ratios, dividend yields, and short-term and long-term growth in profits and sales, the SET found SET-Growth had a total return of 151%, higher than SET-Value, which had a return of 111%.

The long-term average yield margin between SET-Growth and SET-Value is roughly 2.1% per year.

In early 2021, the SET-Growth portfolio was heavily weighted in commercial, finance, food, and electronics sectors, accounting for 70% of the portfolio.

The top 10 stocks in SET-Growth were mostly growing businesses or those aided by the lockdown, such as technology businesses, retail, hospitals and export businesses that recovered in line with the global market. The top 10 had an average P/E ratio of 24.4 times, a P/B ratio of 4.59 times, and a dividend yield of 2.15%.

Meanwhile, the SET-Value portfolio was heavily weighted in banking, energy and utilities, and real estate, accounting for more than 80% of the portfolio.

The top 10 stocks in SET-Value were mostly companies with businesses that were negatively affected by the pandemic, such as large commercial banks with a tendency to set aside provisions for bad debts that have a chance to increase. Energy businesses were dented by the decrease in oil prices.

The group had an average P/E ratio of 12 times, a P/B ratio of 1.54 times, and a dividend yield of 4.69%.

The relative performance of SET-Growth compared with SET-Value fluctuates over time and moves in the opposite direction of the long-term interest rate, according to the SET. That means when interest rates rise, it has a more negative effect on growth stocks and their cash flow structure than value stocks.

However, SET-Value has slightly lower volatility.

According to the SET, SET-Growth showed a higher standard deviation (SD) per year than the SET100 TRI Index for all periods, while SET-Value, which consists of stocks known for relatively stable performance, has a lower SD than the index. This suggests SET-Growth is more volatile than the benchmark.

SET-Value's Sharpe ratio, which measures excess average returns over the risk-free rate and SD, is also higher than that of SET-Growth and the SET TRI Index over the past three months as well as one year.

When analysing SET-Growth's performance attribution for the past 10 years based on the indicators, the basket of stocks had a 61.8% surplus return on the benchmark index, a 21.3% return from the allocation of funds by industry (allocation effect), and a 40.5% return on stock selection.

Stocks in SET-Growth that are overweight in the market index are service, finance, agricultural and food stocks. These include those related to retail services that have benefitted from lockdowns and the work-from-home policy such as electrical appliances and gadgets, home furnishings, ready-to-eat food and beverage, and hospitals and non-bank lending businesses that are expanding and have high performance growth.

Stocks in SET-Growth that are underweight on the market index include energy and petrochemicals, which are affected by the volatility of crude oil prices on the global market.

Meanwhile, SET-Value stocks had a 22.3% surplus return on the benchmark index, a 3.64% return from the allocation effect, and an 18.6% return on stock selection.

Stocks in SET-Value that are overweight on the market index are finance, real estate and construction stocks, as their valuation remains low due to the pandemic.

Stocks in the SET-Value portfolio that are underweight on the market index are service and energy sectors.


SCB Securities (SCBS) said both types of stock strategies are suitable for investors, depending on which theme the individual uses to make decisions.

For example, people focusing on long-term investments lasting 3-5 years that want to earn dividends will mainly invest in value stocks, according to SCBS.

Investors emphasising the short term, meaning they will hold it less than a year and aim to profit from a spread or capital gain, will prefer growth stocks.

In general, long-term investments were found to have a higher chance of success, based on the Fama and French paper published in the Journal of Finance in 1992, said the brokerage.

The research studied the correlation between P/E ratios and P/B ratios of stocks in the US stock market and their returns between 1963 to 1990.

The stocks were divided into 10 groups based on their P/E ratios and P/B ratios, then the researchers calculated future returns based on the data.

The results found value stocks with lower P/E ratios and P/B ratios had an average return of 21-23% per year, while growth stocks had an average return of 7-12% per year.

The Fama and French research also studied these correlations in 12 other global stock markets and found during 1975-1995, the returns of value stocks were higher than those growth stocks as well as overall returns in all countries.

According to SCBS, value investors may choose value stocks initially to receive dividends, then sell them to growth investors when the share price starts to rise from good performance.

Likewise, when a company's growth in sales and profits begins to decline, growth investors will start selling shares to take profits from the price difference, while value investors will step in to invest, said the brokerage.

There is no fixed formula to determine which investment themes will generate more returns for investors because the selection of stocks is only one of many factors that dictate the success of investment, said SCBS.

Before buying stocks, investors need to consider various factors such as the overall condition of the economy and its future direction, an analysis of the industry and company, and the stock valuation to make sure the potential purchase best suits their investment style, said the brokerage.

An investor looks at an electronic board displaying stock prices at a brokerage. Pornprom Satrabhaya

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