Growth Vs Value GS

10 April 2018 | 7:58PM BST
Global Macroscope
Growth vs. Value; finding the right balance
n For the MSCI AC World market, ‘Growth’ has outperformed ‘Value’ by around Peter Oppenheimer
+44(20)7552-5782 |
60% over the past 11 years (and by 80% in Europe). This is the longest and peter.oppenheimer@gs.com
Goldman Sachs International
strongest period of relative outperformance since the mid-1970s.
Sharon Bell, CFA
n
+44(20)7552-1341 | sharon.bell@gs.com
There are several good reasons for Growth’s outperformance. The post financial Goldman Sachs International
crisis period has, until recently, experienced a very weak economic and profit Lilia Peytavin
+44(20)7774-8340 |
recovery. Coupled with this, low inflation and less investment spending have
For the exclusive use of DHOOPER@CENTERVIEWPARTNERS.COM
lilia.peytavin@gs.com
Goldman Sachs International
reduced the proportion of high growth stocks in major equity markets. Growth
Guillaume Jaisson
has been ‘scarce’ and therefore highly valued, and its longer ‘duration’ has +44(20)7552-3000 |
guillaume.jaisson@gs.com
benefited from record low bond yields. Goldman Sachs International
n The success of Technology has also supported Growth. Low capital employed
companies have outperformed high capital employed companies in recent
years, correlating closely with Growth vs. Value.
n But most of the outperformance and higher valuations of Growth vs. Value
can be explained by higher margins, earnings and ROE. This suggests that
backing genuine Growth companies still makes sense.
n The underperformance of Value partly reflects the relentless decline in bond
yields in recent years. In some markets, such as Europe, particular
regulatory/competitive problems in the bank, oil and utility sectors have also
played a role. But these sectors are transitioning from ‘value traps’ into genuine
Value opportunities and are likely to be rewarded as returns improve. We expect
less of a ‘Macro market’ driven by binary choices between factors (Cyclicals vs.
Defensive or Growth vs. Value) and prefer having an eclectic mix.
n The significant outperfomance of the US equity market relative to the rest of the
world since the financial crisis has correlated with the Growth vs. Value story.
The US has had more growth (it has 25% exposure to tech compared with 5% in
Europe, for example) but has had fewer value traps. Recently, US equities have
started to underperform both in local currency and USD terms. This trend is likely
to continue as the USD remains weak and selected Value starts to recover.
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report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC
certification and other important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research
analysts with FINRA in the U.S.
Goldman Sachs Global Macroscope
Why has Growth performed so well?
The post financial crisis world has thrown up many unusual situations for investors; it
has been a cycle like no other. Record low interest rates, QE, the weakest (until
recently) but longest economic cycle post war, and so on. But these conditions have
meant that macro factors have become dominant in driving performance across sectors,
and also across and within equity markets.
Factor investing has become popular because macro factors, such as persistent
falls in bond yields, have had a significant impact on groups of companies or
industries. Some broad factor sensitivities are easy to understand: Cyclical versus
Defensive performance, for example, continues to correlate closely with economic
activity. Others, such as ‘Growth’ versus ‘Value’, have experienced less of a cyclical
dynamic but more of a secular one since the financial crisis. We look at the reasons
why but also why it makes sense to be more selective now. Many of the conditions that
have boosted returns in Growth continue, but several unique factors that have
dampened the returns to Value are fading. We think it is time to be more eclectic.
Growth has had a record period of outperformance

Since the financial crisis, Value as a factor has performed poorly. This has been
particularly the case relative to Growth. Looking at the MSCI World Value versus Growth
indices shows an astonishing period of underperformance of Value, which has continued
since the financial crisis started (Exhibit 1).
Exhibit 1: The record outperformance of ‘Growth’ vs. ‘Value’

MSCI World Value vs. Growth
185
Growth outperforming
World Value vs Growth

170
155
140
125
110
95
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: Datastream, Goldman Sachs Global Investment Research
10 April 2018 2
Exhibit 2: Periods of Growth outperforming Value

MSCI World
Periods of MSCI World Growth outperformance
Growth vs. Value MSCI World
Start End Length (years)
Performance Annualised Performance Annualised
Mar-78 Nov-80 2.6 14% 5% 51% 17%
Jan-84 Apr-87 3.2 21% 6% 149% 33%
Jul-88 Dec-91 3.4 15% 4% 18% 5%
Jul-94 Feb-00 5.6 46% 7% 114% 15%
Dec-06 Apr-18 11.3 59% 4% 39% 3%
The relative performance of Growth versus Value has been the strongest since the
MSCI Value and Growth indicators started in 1975. As Exhibit 2 shows, World Growth
has outperformed Value by 60%, while in Europe it has outperformed Value by 80%
since the start of 2007. In the World indices the current cycle of Growth outperformance
has lasted for 11.3 years, twice as long as the previous longest stretch in the late 1990s.
There are various reasons for this unprecedented strength of Growth.
1. Poor economic and profit growth; the ‘scarcity’ of Growth

Until late 2016 the economic recovery was very weak and consistently disappointed
expectations. Investors rewarded Growth because it was scarce. This has been the
case even for the US economy, which, until recently, was the only major economy to
recover from the recession in 2009.
Exhibit 3: US real GDP following recessions
155
1953
1957
145 1960
1969
135 1973
1980
125 1981
1990
2001
115
2007
105
Quarters
95
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
Source: Haver Analytics, Goldman Sachs Global Investment Research
10 April 2018 3
The scarcity of Growth was not just a function of weak economic activity but also the
persistent pattern of economic and earnings downgrades. Exhibits 4 and 5 show the
pattern of growth and earnings revisions in the post financial crisis environment. Up until
2016, the relentless pattern of downgrades was a dominant trend. Faced with such
weakness, and with uncertainty, investors were prepared to back and reward
companies and sectors that were perceived to deliver dependable Growth. This
was even the case at the country level (a point we will come back to later in this piece)
as investors were attracted to the US equity market given it was underpinned by better
economic and profit growth than many of it peers across the world.
Exhibit 4: Global growth has beaten expectations Exhibit 5: Global earnings are being revised up materially
G7 Consensus Real GDP Growth Forecast I/B/E/S consensus calendarised earnings for MSCI World ($) over time
3.0 $145
%
2019E
2.8 $140
$135 2013
2.6
$130
2.4 2015
2014
2018: 2.1% $125 2018E
2.2
$120
2.0 2017: 2.1% 2017
$115
1.8 2012
2015: 1.9% $110
1.6 2014: 1.7% 2019: 1.8% $105
1.4 2011: 1.4% 2012: 1.4% 2016
$100
1.2 2013: 1.2% 2016: 1.5% $95
1.0 $90
10 11 12 13 14 15 16 17 18 2011 2012 2013 2014 2015 2016 2017 2018
Source: Bloomberg, Goldman Sachs Global Investment Research Source: I/B/E/S, Goldman Sachs Global Investment Research
2. Less inflation and investment has reduced the proportion of Growth companies
Another factor boosting the Growth factor is that the number of companies that have
been able to deliver strong top line growth has also faded in recent years. This, in part,
reflects lower inflation and to some extent the fall in investment spending across the
corporate sector. Outside of technology spend, companies have generally been more
prepared to use cash to buy back shares (in the case of the US) or sit on cash (given
concerns about recession in Europe) than to spend on traditional capex. Low interest
rates and QE have also protected capacity that might otherwise have been taken out as
a result of technological innovations or greater competition. As Exhibit 6 shows, the
proportion of companies globally that are expected to sustain top line growth of 8% on
consensus FY3 projections continues to fall.
10 April 2018 4
Exhibit 6: Just 13% of European companies have high expected sales growth
% of companies with high expected sales growth in FY3
50%
High growth (>8%)
45%
40%
35%
30%
25%
25%
20%
15%
10%
MSCI AC World SXXP 13%
5%
0%
98 00 02 04 06 08 10 12 14 16 18
Source: Bloomberg, Goldman Sachs Global Investment Research
3. Technology stocks enjoyed particular growth

While weak economic activity acted as a headwind for economically sensitive
companies and sectors, technology stocks also generated remarkable profit and margin
growth. Between the last peak in 2007 and now, technology companies in the US have
driven around 80% of the rise in US margins. It is true that even margins outside of the
technology sector have increased (even in the more economically challenged Europe
region), but the rise in margins in technology has been an important contributor to the
outperformance of Growth. The technology sector makes up 30% of the MSCI US
Growth index, although of course many technology-related stocks also fall into other
areas of the market, such as consumer services, which also makes up 20%.
10 April 2018 5
Exhibit 7: The gap between US and European margins halves if we exclude technology
Net income margins, in all cases ex financials (%)
12 US
US ex tech
Europe
10
Europe ex tech
2
0
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research
4. Companies with less capital employed have enjoyed much higher returns
Another reason why Growth has done so well in recent years is that there has been a
significant shift in the performance of companies that are less capital-intensive. This is,
of course, partly because so many of the lowest capital employed companies are
technology companies, or are ‘disrupters’ employing technology. It is also because
in the capital-intensive sectors the impact of QE and years of close to zero rates
have prevented weak companies from exiting, and have therefore pushed margins
and returns down.
We can gain a sense of this by ranking companies according to their assets/employee,

their income/assets and their income/capex ratios. We can then separate them between
high and low capital intensive sectors1. Just as technology and Growth have
outperformed since the start of the financial crisis, so too have low capital intensive
companies.
1
Capital Intensive Sectors: Forestry & Paper, Industrial Metals & Mining, Automobiles & Parts, Leisure
Goods, Construction & Materials, Oil Equipment & Services, Fixed Line Telecommunications, Mobile
Telecommunications, Electricity, Gas, Water & Multiutilities
Non Capital Intensive Sectors: Beverages, Food Producers, Household Goods & Home Construction,
Personal Goods, Tobacco, General Retailers, Health Care Equipment & Services, Pharmaceuticals &
Biotechnology, Software & Computer Services, Technology Hardware & Equipment
10 April 2018 6
Exhibit 8: Performance of capital and non capital intensive sectors

World aggregate
1600
Capital Intensive Non Capital Intensive

1400
1200
1000
800
600
400
200
0
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Source: Worldscope, Datastream, Goldman Sachs Global Investment Research
5. Growth stocks have widened their relative ROE and earnings strength, justifying their
valuations
Given that many of the companies in the Growth indices are technology companies, or
indeed consumer services companies that are using technology to disrupt traditional
businesses, they have generated very high returns. Both in the case of the World equity
market overall (Exhibit 10) and in Europe in particular (Exhibit 9), the ROE generated in
the Growth segment of the market has been much higher than for Value and the gap
has widened since the financial crisis.
Exhibit 9: Growth generated higher ROE than Value in the market, Exhibit 10: ...but also globally
and not just in Europe... ROE
ROE
25 20
MSCI Europe
18
MSCI Europe Value
20 16
MSCI Europe Growth
14
15 12
10
10 8
6
MSCI AC World
5 4
MSCI AC World Value
2
MSCI AC World Growth
0 0
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: FactSet, Goldman Sachs Global Investment Research Source: FactSet, Goldman Sachs Global Investment Research
10 April 2018 7
6. Growth companies have benefited from lower bond yields

Given that Growth sectors tend to be longer duration than the market overall, they have
benefited from lower bond yields.
Exhibit 11: Performance of MSCI World Growth vs. MSCI World, Exhibit 12: Performance of MSCI Europe Growth vs. STOXX 600
compared with 10-year US bond yields compared with 10-year interest rates
10-year interest rates calculated using 75% Germany and 25% UK
130 5.5 135 5.5
5.0 5.0
125 130
4.5 4.5
125
120 4.0 4.0
3.5 120 3.5

115
3.0 3.0
115
2.5 2.5
110
2.0 110 2.0
105 1.5 1.5
105
1.0 1.0
100 MSCI World Growth vs MSCI World 100 MSCI Europe Growth vs STOXX 600
0.5 0.5
US 10 year interest rates
Europe 10 year interest rates

95 0.0 95 0.0
07 08 09 10 11 12 13 14 15 16 17 18 07 08 09 10 11 12 13 14 15 16 17 18
Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
7. Growth valuations are high but largely justified in our view

Valuations of Growth stocks have increased. In the case of the US they are back to the
relative highs last seen in the early 1990s. In Europe they are less expensive relative to
history but this in part reflects the depth of the crisis for value stocks – and banks in
particular – during the financial crisis.
Exhibit 13: Relative valuations of Growth are above their historical average – but Europe is still cheaper
relative to the World
12m fwd P/E Premium of Growth vs. Value
70% MSCI Europe Growth vs.Value

MSCI AC World Growth vs.Value
60%
50%
40%
30%
20%
10%
0%
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: FactSet, Goldman Sachs Global Investment Research
10 April 2018 8
But it is not clear that Growth as a factor has become too expensive relative to its
fundamentals. Exhibit 14 shows the different drivers of returns between Growth and
Value indices in the US, Europe and for the World aggregate.
Exhibit 14: Strong earnings growth has justified returns and valuation in the Growth factor
Contribution to price performance since Jan-09
300% 278% Valuation contribution
Earnings contribution
250%
Price change
200%
168%
76 pp.
150% 130%
93% 87% 37 pp.

100%
78 pp. 36% 68 pp.
36 pp.
50%
24 pp. 32 pp. 63 pp.
22 pp. 166 pp. 64 pp.
0%
-66 pp.
-50%
Value Growth Value Growth Value Growth
US Europe World
Source: FactSet, Datastream, Goldman Sachs Global Investment Research
The better performance has been largely justified by superior earnings, and the
contribution of valuation changes to the returns is not very different. While the
absolute numbers are lower in Europe, the differences are no less striking. The Growth
index has generated more than four times greater earnings than the Value index over
the past decade.
10 April 2018 9
Why has Value performed so poorly?
Of course, the strength of Growth stocks is one part of the story; the weakness in Value
is another. Why has this happened?
The impact of falling bond yields

Part of the explanation for this is the sector exposure of the Value factor and its
sensitivity to both economic growth and bond yields.
Weak growth and falling bond yields – which in many ways reflected the weak growth
conditions – have dampened the returns of Cyclical sectors, which have a high weight in
the Value indices (banks, oil & gas and utilities) and are typically shorter duration.
Exhibit 15: Value has more cyclicals than growth

Sector weight differentials
20
15
MSCI AC World Value minus Growth
15
10
6
4 4 3
5 3
2
1 0
0
0 -1 -2 -2 -2 -2
-5 -3
-6 -7
-10
-12
-15
Utilities
PHHG
Banks
Insurance
Travel & Leisure
Media
Telecom
Tech
Oil & Gas
Food & Beverage

Basic Resources
Retail
Chemicals
Cons & Mat
Health Care
Auto & Parts
Real Estate
Industrials
Financial Services
At the same time, the Growth versus Value indices also correlated with falling bond
yields.
Exhibit 16: There is a close relationship between the relative Exhibit 17: ...which is also the case for Value vs. Growth
performance of Cyclicals and moves in bond yields... Performance of Value vs. Growth, US 10-year bond yields
Performance of Cyclicals vs. Defensives, US 10-year bond yields
10 160
105
Europe Cyclicals vs. Defensives Europe Value vs. Growth
9 150 6
US 10Y BY (RHS) US 10Y BY (RHS)
95
8
140
85 5
7
130
75 6
120 4
5
65
110
4
55 3
100
3
45 90
2 2
35 1 80
25 0 70 1
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 06 07 08 09 10 11 12 13 14 15 16 17 18
10 April 2018 10
Consequently, both Cyclicals and Value are likely to perform better in stronger growth
environments and when bond yields are rising. Our economists do expect growth to
continue to be strong, albeit with slower momentum, over the next couple of years, and
they also expect higher term premia to push bond yields higher. But other factors may
start to look more supportive for some parts of the Value universe. In particular, there
are sectors that have been perceived as ‘value traps’ for several years because of a
relentless decline in returns. This has been particularly the case in Europe, where
specific competitive and regulatory headwinds have resulted in significant dividend cuts
for some of the sectors. For example, the dividend growth of the banks, oil and utility
sectors was very strong in the decade leading up to the financial crisis but it has since
collapsed (Exhibit 18). We believe that these sectors, which still offer average dividend
yields of 5%, are likely to enjoy renewed dividend growth over the coming years helping
to transition these ‘value traps’ into value opportunities (see grey box for details).
Exhibit 18: Dividends are beginning to recover – Oil & Gas, Banks and Utilities
DPS relative to the European market ex financials
160
Relative DPS of Deep Value Traps
150
140
130
120
110
100
90
80
95 97 99 01 03 05 07 09 11 13 15 17
10 April 2018 11
Oil — moving from an ‘Investment’ to ‘Restraint’ phase

Oil companies have suffered from collapsing oil prices but, between 2003 and 2013, they also entered
what our oil analysts term an Expansion phase. This is a part of the cycle for oil companies, which is
characterised by sharp EPS growth in the initial years as investment ramps up but which quickly loses
momentum, forcing multiples to contract and leading to poor shareholder returns. These ‘Big Oils’ tend to
perform best in what our oil analysts call the ‘Restraint’ phases of the cycle – defined by backwardation,
cost deflation and consolidation – when a high risk premium on long-term oil prices restrains investment
and creates high barriers to entry. Our oil analysts believe that the sector is now entering a Restraint
phase, which should help drive returns. See Global Energy: A new era for oil investing: The Age of
Restraint, 22 March 2018.
Banks – regulatory and capital headwinds fade

Banks suffered more than most sectors in the aftermath of the financial crisis – indeed, they were at the
epicentre of it, particularly in the US and then in Europe. The headwinds that they encountered were
legion. Falling leverage, tighter capital requirements and regulation, fines, weak growth and collapsing net
interest margins were some of the most persistent problems. But with the fin-reg process complete, even
banks in Europe have managed to pay dividends in 2017, with €54bn to shareholders. See Europe Banks:
The Aggregate Picture: costs, slow walking DIV hikes, the Great Valuation gap, 8 March 2018.
Utilities – consolidation and increased returns

While US utilities performed well as bond yields fell over recent years, European utilities did not. Our
analysts believe that much of this reflects a problem of complexity. They have argued that the recent
moves by EON (the Uniper spinoff) and RWE (innogy’s listing) may herald a new chapter in the sector’s
history: the era of futureproof/pure play utilities driving higher returns as they are set to rediscover secular
growth thanks to a capex super-cycle in electricity distribution grids and renewables, which are likely to
generate much higher returns. See Europe: Utilities: Power Shift 2.0: Futureproof or pure plays? Routes to
unlocking value, 6 July 2017.
10 April 2018 12
How US versus Europe plays into the Growth versus Value theme
The outperformance of the US equity market relative to others (such as Europe) has
been significant since the financial crisis began. But the recent period has started to see
some reversal. This is the case when comparing performance in local currency returns
but even more so in US Dollars.
Exhibit 19: Since 2009, the US has outperformed the rest of the Exhibit 20: ... as well as in USD
world in local currency... USD
Local currency
160 150
US vs World ex US US vs World ex US
150 140
130
140
120
130
110
120
100
110
90
100
80
90 70
80 60
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
While it has not always been the case, at least since the financial crisis, the relative
performance of US equities versus Europe reflects the Growth versus Value relative
leadership (Exhibit 21).
Exhibit 21: Europe vs. US performance has moved with Value vs. Growth
Performance of Value vs. Growth and STOXX 600 vs. S&P 500
180 120
MSCI AC World Value vs. Growth
170 STOXX Europe 600 vs. S&P 500 110
160
100
150
90
140
80
130
70
120
60
110
100 50
90 40
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
10 April 2018 13
In effect, Europe in particular has simply had less of the ‘good’ stuff (such as
technology) and more of the ‘bad’ stuff (such as banks) in recent years. For
example, Exhibit 22 shows that the US has 25% exposure to technology (more if you
include ‘technology’ stocks that are in other sectors, but 23% exposure to Value sectors
such as financials, utilities and oil. By contrast, Europe has 5% exposure to technology
and 32% exposure to these Value sectors.
Exhibit 22: The US has more growth and less deep value than Europe
Sector weights by region
40%
Tech Financials, Utilities, Oil & Gas
35% 34%
32%
30%
27% 27%
25%
25% 23%
20%
18%
15%
15% 13%
10%
5%
5%
0%
Asia Pacific ex Japan US World Japan Europe
Source: MSCI, FactSet, Goldman Sachs Global Investment Research
Coupled with this, the US has a very large exposure to what we earlier described as non
capital intensive industries compared with high capital intensive industries (Exhibit 23),
which has mattered for performance given the gap in relative performance mentioned
earlier.
Exhibit 23: The US has more low capital intensive companies than Europe
Weight in the market ex financials
70%
Capital Intensive Non Capital Intensive
60% 58%
50%
45%
41%
40%
32% 31% 31% 31%
30%
20% 21%
20%
12%
10%
0%
World US Europe Japan EM
These factors were further supported by US growth. The US was the one
economy, and market for that matter, that managed to generate growth in an
10 April 2018 14
otherwise very weak economic and profit environment. Bear in mind that in the
years prior to 2016 both Asia and Europe experienced six years in a row with virtually no
profit growth. Over the same period the S&P 500 generated almost a 100% profit
growth.
The attractions of the US equity market were also supported by the perceived tail risks
associated with Europe and, subsequently, with EM markets. The former had all the
risks associated with the banking and sovereign debt crisis through 2010 to 2014, while
the latter experienced the risks associated with falling commodity prices and a slowing
China economy in 2014 and 2015.
While technology weakness has certainly played a part in the relative underperformance
of the US in recent weeks, it is not the full story.
As we showed in GOAL Kickstart: How much of the sell-off is technology?, 3 April 2018,
since the recent peak on 9 March 2018, the US equity market has underperformed other
markets whether one includes or excludes technology. Of course, this is partly explained
by the fact that some’tech giants’ in the US are already classified into other sectors. But
the clearcut arguments in favour of being overweight in US equities are fading.
The extent of the ‘deep value’ in Europe compared with the US can be seen in Exhibit
24, which shows the proportion of the equity market in both cases where the dividend
yield is above the average HY corporate bond yield. Until the financial crisis, these were
much the same. Since then, the gap has widened significantly. This partly reflects the
very high dividend yields in the European ‘value trap’ sectors.
Exhibit 24: Europe has a ‘Value’ bias

% of companies with div. yields > corp. bond yield
100%
STOXX Europe 600 S&P 500
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: Goldman Sachs Global Investment Research
10 April 2018 15
So, taken overall, just as the stark contrast between Growth and Value is fading, we
would expect a similar fading of the wide performance gap between the US and the rest
of the world. We think it is time to get more eclectic.
Summary
n Growth is still fairly scarce given the low proportion of companies delivering high
sustained sales growth. We like companies that are reinvesting for future
growth. In Asia, for example, we prefer a GARP strategy, while in the US and
Europe we focus on companies reinvesting for future growth (GSTHHGIR and
GSSTHGIR, respectively). We also highlight companies with a low PEG ratio in
Europe (Europe Weekly Kickstart - Growth conundrum, 6 April 2018).
n However, the prospect of higher bond yields and a continuation of the economic
cycle lead us to look for selected value opportunities. In Europe in particular (where
there is a high weight in deep value sectors), we like banks, oil and utilities, where
we see prospects of a transition for ‘value traps’ to value opportunities.

n We believe the very long period of outperformance of the US relative to the rest of
the world will fade further. A weak Dollar and the recovery of some Value sectors
outside of the US should support this trend.
n Overall, we see less of a ‘Macro market’ dominated by binary choices between
Cyclicals vs. Defensives and Growth vs. Value. We prefer a more eclectic mix
and expect higher dispersion of returns at the stock level.
10 April 2018 16
Correction Detection
The risks of a drawdown within a bull market
Our history of relevant research

Jan. 29, 2018
Many Happy Returns?
Bull Market, 8th birthday
Mar. 24, 2017
10000
MSCI World Total Return $ Any Happy Returns
The Evolution of the Long
9000 Good Buy
Sep. 01, 2016
8000 Below Zero

The Equity Cycle part I 10 effects of negative real
Identifying in the phases interest rates on equities
Oct. 22, 2009 May 04, 2015
7000
The Equity Cycle part II

6000 Investing in phases
Oct. 29, 2009
Share Despair
5000 Anatomy of bear markets and The Globology Revolution Bear Necessities
the prospects for recovery Globalization, technology Identifying signals
Dec. 12, 2002 and BRICs for the next bear
May 12, 2006 market
4000
Sep. 13, 2017
3000 The Long Good Buy

The Case for Equities

March 21, 2012
2000
The Long Good Buy II The Third Wave

1000 1SRXLW3Rŷ8LI'EWIJSV Wave 3 of the Crisis and
Equities Continues the Path to Recovery
Sep. 11, 2013 Oct. 7, 2015
0
Sep-97 Jul-99 May-01 Mar-03 Jan-05 Nov-06 Sep-08 Jul-10 May-12 Mar-14 Jan-16 Nov-17
Bear Repair
Anatomy of a bull market
Apr. 26, 2004 Adventures in Wonderland
Scenarios for a Post-Crisis World
Oct. 21, 2014
Share Despair: Anatomy of bear markets and the prospects for recovery, Dec. 12, 2002
Bear Repair: Anatomy of a bull market, Apr. 26, 2004
The Equity Cycle part I: Identifying the phases, Oct. 22, 2009
The Equity Cycle part II: Investing in phases, Oct. 29, 2009
The Long Good Buy; the Case for Equities, March 21, 2012
The Long Good Buy II; 18 Months On…The Case for Equities Continues, Sep. 11, 2013
Adventures in Wonderland: Through the looking glass: Scenarios for a post-crisis world,
Oct. 21, 2014
Below Zero: 10 effects of negative real interest rates on equities, May 4, 2015
The Third Wave: Wave 3 of the Crisis and the Path to Recovery, Oct. 7, 2015
Any Happy Returns: The Evolution of the ‘Long Good Buy’, Sep. 1, 2016
Bull Market, 8th birthday - Many Happy Returns?, Mar. 24, 2017
Bear Necessities: identifying signals for the next bear market, Sep. 13, 2017
Correction Detection: the risks of a drawdown within a bull market, Jan. 29, 2018
10 April 2018 17
Equity Basket Disclosure
The ability to trade the basket(s) discussed in this research will depend upon market
conditions, including liquidity and borrow constraints at the time of trade.
Other Disclosures
All MSCI data used in this report is the exclusive property of MSCI, Inc. (MSCI).
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10 April 2018 18
Disclosure Appendix
Reg AC
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10 April 2018 19
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Growth Vs Value GS

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10 April 2018 | 7:58PM BST

Growth vs. Value; finding the right balance

Why has Growth performed so well?

Growth has had a record period of outperformance

Exhibit 1: The record outperformance of ‘Growth’ vs. ‘Value’

World Value vs Growth

Source: Datastream, Goldman Sachs Global Investment Research

Exhibit 2: Periods of Growth outperforming Value

Source: Datastream, Goldman Sachs Global Investment Research

There are various reasons for this unprecedented strength of Growth.

1. Poor economic and profit growth; the ‘scarcity’ of Growth

Exhibit 3: US real GDP following recessions

Source: Haver Analytics, Goldman Sachs Global Investment Research

Source: Bloomberg, Goldman Sachs Global Investment Research

3. Technology stocks enjoyed particular growth

Source: Datastream, I/B/E/S, Goldman Sachs Global Investment Research

We can gain a sense of this by ranking companies according to their assets/employee,

Exhibit 8: Performance of capital and non capital intensive sectors

Capital Intensive Non Capital Intensive

Source: Worldscope, Datastream, Goldman Sachs Global Investment Research

6. Growth companies have benefited from lower bond yields

130 5.5 135 5.5

3.5 120 3.5

Europe 10 year interest rates

7. Growth valuations are high but largely justified in our view

70% MSCI Europe Growth vs.Value

Source: FactSet, Goldman Sachs Global Investment Research

93% 87% 37 pp.

Source: FactSet, Datastream, Goldman Sachs Global Investment Research

Why has Value performed so poorly?

The impact of falling bond yields

Exhibit 15: Value has more cyclicals than growth

Travel & Leisure

Food & Beverage

Cons & Mat

Source: Datastream, Goldman Sachs Global Investment Research

DPS relative to the European market ex financials

Source: Worldscope, Datastream, Goldman Sachs Global Investment Research

Oil — moving from an ‘Investment’ to ‘Restraint’ phase

Banks – regulatory and capital headwinds fade

Utilities – consolidation and increased returns

Source: Datastream, Goldman Sachs Global Investment Research

Source: MSCI, FactSet, Goldman Sachs Global Investment Research

Source: Worldscope, Datastream, Goldman Sachs Global Investment Research

Exhibit 24: Europe has a ‘Value’ bias

Source: Goldman Sachs Global Investment Research

we see prospects of a transition for ‘value traps’ to value opportunities.

Our history of relevant research

8000 Below Zero

The Equity Cycle part II

3000 The Long Good Buy

The Case for Equities

The Long Good Buy II The Third Wave

Bear Repair: Anatomy of a bull market, Apr. 26, 2004

Equity Basket Disclosure

Rating Distribution Investment Banking Relationships

Disclosures required by United States laws and regulations

Ratings, coverage groups and views and related definitions

Global product; distributing entities

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