Shifting The Goalposts

Updated: Feb 23, 2020

The relationship between ‘Growth’ stocks and ‘Value’stocks has significantly evolved over three decades. Think of ‘Growth’ as standing for premium, structural growth whilst ‘Value’ is primarily driven by basic, cyclical factors. The difference between the two is equivalent to the valuation spread between the most expensive and cheapest stocks within each sector for the entire stock market.


Two contrasting trends emerged from the report: a declining spread during the 2000-2008 period as Value got increasingly popular followed by a 180-degree trend reversal in favor of Growth since the Great Financial Crisis. The explanation is fairly simple: As the noughties saw an abundance of growth, growth became a commodity. In that context, Value led relative to Growth. The exact opposite conditions have prevailed since 2009: the scarcity of global growth has logically resulted in a premium for it. In fact, Value has never been as cheap as today, which is entirely consistent with the evolution of the High Quality Industrials premium highlighted in these notes over the years (including most recently in ‘Superstardom’).*


When considering what could happen next to the relationship between Growth and Value, a brilliant 2017 book entitled ‘The Doughnut Economics’ by Kate Raworth, a British economist, proved highly relevant. In it, the author describes two differing perspectives on global trends.


Under a benign scenario, a technology-led boom brings the world back to an environment in which growth is commoditized. Extraordinary gains in productivity allow a lot more to be produced with a lot less, thereby decoupling economic growth from planetary resources. As a result, the equities trend observed in the last ten years reverses back from a Growth premium to a Value-led stock market. Incidentally, this scenario sees the current premium enjoyed by High Quality Industrials melt.


In the alternative scenario, the global economy has reached a ‘post-growth’ stage, at least in raw GDP terms: There are no sufficient resources to support historical growth levels. Worse, addicted to growth, the world has overshot its production potential, pushing the global economy into an unsustainable state.


Kate Raworth then introduces the doughnut concept whereby the inner boundary of the donut represents minimum social standards and the outer one an ecological ceiling. A sustainable economic model taking into consideration the need for strong social foundations and the availability of physical resources is achieved in-between, in the thickness of the donut. As a consequence, the current pillars of the capitalistic system are to be redesigned to become, in the words of Mrs. Raworth, ‘growth-agnostic’. The author then discusses the far-reaching implications for wealth measurement (away from GDP), monetary policy, fiscal policy, etc.


Under the ‘post-growth’ scenario, it appears to me that ‘success’ would have to be entirely redefined. Humans’ invaluable competitive streak – that exceptional drive to win – would need to be diverted away from the objective of incremental wealth accumulation towards higher sustainability ratings. It would be similar to going on a diet: The satisfaction arising from some form of indulgence must be replaced with that of discipline and long term health for an identical, if not higher level of happiness. It is always about wanting more since humanity is wired that way – just more of a good thing, instead of more of a bad one. The goalposts must be simply shifted.


In this context, Growth will continue to win against Value hands down, and the premium enjoyed by High Quality Industrials will stay, if not increase – noting that the definition of Growth will morph to encompass sustainability. Indeed, isn’t sustainability a growing concept?

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