Faced with a raging debate about Growth versus Value* in the stock market, I have been looking for a source which helps put the current dynamics in a historical perspective, beyond the short horizon stats and usual banalities.
This quality report triggered various thoughts relevant to the ‘The Great Industrial Split’ thesis shared in early 2019. It shows that Value last deeply underperformed Growth for a sustained period of time between 1926 and 1941. While mass production, automobiles and the use of oil as a source of cheap energy emerged at the beginning of the century, it is only then that widespread adoption was achieved, setting the stage for full deployment in the following decades. Over these fifteen years which mark a turning point, manufacturing stocks contributed to the outperformance of Growth (led by GE, GM, Sears amongst others) while the beneficiaries from the previous boom in infrastructure, namely railroads and utilities, weighed on the performance of Value.
According to the report, the current times coincide with a new turning point. The information and communication technologies which irrupted in the 70s have finally reached true mass adoption. As a result, Growth, led by tech stocks, has materially outperformed Value over the last decade or so. Value will make its comeback when the benefits from new technologies are deployed through and efficiently applied to the broader economy. At that future point in time, Growth will become more diffuse and commoditized than it is today.
The industrial sector is in a rather particular situation when considering these dynamics since it has a foot in both Growth and Value. The vast equity market split between Growth and Value is occurring within the industrial world, and within large cap industrial tech companies. This has implications for leadership teams, independently from investor preferences: can Growth and Value assets be managed in a similar fashion from a strategic, operational and capital structure perspective? Can there be a unified culture around both categories? Is there an identical, optimal organizational structure for both sets of assets?
If these questions were pertinent in early 2019, they are even more so today when considering the expected impact from the health crisis on the pace of technological adoption. The historical perspective shared above puts emphasis on the need to manage a dual transition: On the one hand, industrial Growth assets must be brought to their next development stage which is when the newly adopted technologies are applied in a more effective and efficient manner across all sectors of the economy. Without this application layer, material gains in productivity cannot be realized. On the other hand, industrial Value assets ought to be operationally optimized and, in some cases, responsibly managed under the best ESG guidelines towards their final maturity stage. Both transitions require not only a different set of competencies but also attention and focus.
Altogether these dynamics further support the notion of a Great Industrial Split.
* Growth stocks : Growth and/or quality (less discounted growth profile) and resilience; Value stocks: Lower growth and/or lower quality (more discounted growth profile), cyclicality
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