Value versus Growth

Recently, a value investor (V) and a growth investor (G) unexpectedly met on the tram and discussed which regions they wanted to prioritize for their stock investments in the future.

G: Two months ago, I replaced my Swiss stocks in my portfolio with an ETF in American stocks. The large IT companies – the «magnificent 7» – have been driving global growth for years and the performance of these stocks is far higher than that of Swiss stocks, which remain concentrated in traditional sectors such as pharmaceuticals, food and financial services.

V: I can understand that. However, I am concerned about the high valuation of the US stock market. The price-earnings ratio (P/E ratio) is now close to 30. This results in an earnings yield of only 3.4%. Compared to the Swiss stock market at 4.9%, the earnings yield is therefore 1.5% lower.

G: As long as the profits of the tech giants grow more than 1.5% faster than those in traditional sectors, that is not a problem. The outlook for this is good.

V: Perhaps. But the higher profit growth in these sectors would have to be permanent – effectively forever – in order to offset the valuation difference. What also concerns me when investing in US stocks is the USD risk.

G: I have taken precautions – I hedged the USD risk by purchasing a fund tranche hedged in CHF.

V: If the interest rate differential between USD and CHF remains unchanged, you will lose about 4.5% per year of the return generated in local currency/USD when hedging the currency risk into CHF. In order for your calculation to work and for the valuation difference between American and Swiss stocks to be offset, you therefore need not only 1.5% but 5.9% higher profit growth of US stocks (in USD) compared to Swiss stocks (in CHF) per year.

G: That is actually a lot of wood.

V: Wood or bytes – that is indeed the question.