Put off by bank woes, investors ditch value buying for growth stocks

With emerging-market equity valuations 11 per cent lower from a January peak, investors may be expected to hunt for cheap stocks. And given the global growth slowdown, they would probably be buying stable, dividend-paying companies. In fact, they’re doing neither.

While the MSCI Emerging Markets Index, the broader benchmark for the asset class, is little changed since May, two groups of stocks within the gauge are diverging in performance. So-called value stocks -- mature companies with steady cash flows -- are underperforming growth stocks -- upstarts with business potential but weak balance sheets.

Value stocks plunge to a 15-month low against growth stocks

The MSCI EM Value Index has declined 4.4 per cent since May, compared with a 4 per cent gain for the MSCI EM Growth Index. That has taken the ratio between them to a 15-month low, according to data compiled by Bloomberg.

This setback for value stocks ceases to be surprising when individual equity performances are considered. Most of the decline in the MSCI benchmark gauge since May has come from banks that are established and mature.

Ten financial institutions are among the 15 worst stocks on the index. One country stands out: India.

India’s banking industry has been caught in turmoil over souring loans, with the crisis first emanating from the less-regulated non-bank financial companies such as IL&FS Group. Since then, more institutions have come under investor scrutiny, including IndusInd Bank and Yes Bank. Even healthier financial companies have declined in the Mumbai market because of the slump in sentiment and a domestic slowdown.

Five of the 10 worst-performing financial companies on the MSCI index since May are from India.

Given that value stocks typically outperform in a risk-off environment, and growth stocks in a risk-on milieu, the former are missing out an opportunity and may lag even further when emerging markets recover.