Editorial 1: Growth vs. value, the age-old investing debate
Introduction
- There are two broad classifications for long-term equity investments: growth and value stocks.
Growth stocks
- Growth stocks are those that offer higher-than-market average growth in terms of earnings and revenue.
- They are generally characterised by high price-to-earnings ratios (reflecting the higher growth rate),
- low-cost structures due to network effects (hence lower capital requirements),
- low dividend yields and lower reliance on debt to fund capital requirements.
- Therefore, these companies tend to have manageable debt levels and raise capital predominantly through issuing equity rather than borrowing.
Value companies
- On the other hand, value companies tend to have higher working-capital requirements, greater reliance on borrowing to fund capital requirement, high dividend yields and low price-to-earnings ratios.
- They generally have lower profit margins than growth companies due to many factors.
- Value companies tend to operate in commodity markets (resembling perfect competition) rather than the technology industry leading to low product differentiation reducing pricing power (thus, lowering profit margins).
- Companies in India such as Tata Steel , Tata Chemicals and Vedanta fall in this category. These firms would prefer to fund capital requirement through borrowing rather than equity due to high capital requirements stemming from capital expenditure and working capital necessities.
Growth vs. Value: Performance
- When it comes to comparing the historical performances of the two respective sub-sectors of stocks, any results that can be seen must be evaluated in terms of time horizon and the amount of volatility, and thus risk that was endured in order to achieve them.
- Value stocks are at least theoretically considered to have a lower level of risk and volatility associated with them because they are usually found among larger, more established companies.
- And even if they don’t return to the target price that analysts or the investor predict, they may still offer some capital growth, and these stocks also often pay dividends as well.
- Growth stocks, meanwhile, will usually refrain from paying out dividends and will instead reinvest retained earnings back into the company to expand.
- Growth stocks' probability of loss for investors can also be greater, particularly if the company is unable to keep up with growth expectations.
- Growth stocks, in general, possess the highest potential reward, as well as risk, for investors.
Rising interest rates
- However, interest rates in the recent past have been rising, leading to the real debt of value companies to increase. The effect of rising interest rates on value companies can be seen as twofold.
- The first effect is the curbing of inflation erosion in their value of debt and the second effect is lower profit from muted economic activity.
- On the other hand, growth companies are not as adversely affected due to low borrowings and high free cash flow, notwithstanding the rise in interest rates.
- Indian investors will find they do not have access to the growth companies mentioned above. Most high-growth companies in India tend to prefer private equity funding rather than a public listing.
- Another problem Indian investors find is a lack of transparency in financial documents such as balance sheets leading to poor decision-making.
The Bottom line
- The decision to invest in growth vs. value stocks is ultimately left to an individual investor’s preference, as well as their personal risk tolerance, investment goals, and time horizon. It should be noted that over shorter periods, the performance of either growth or value will also depend in large part upon the point in the cycle that the market happens to be in.
Editorial 2: Why is the 1.5 degree Celsius target critical?
Context
- The World Meteorological Organization (WMO) released two reports titled “Global Annual to Decadal Climate Update 2023-2027” and “State of Global Climate 2022.”
The Reports
- The decadal predictions of the WMO said that the annual mean global surface temperature between 2023 and 2027 will be 1.1-1.8 degree Celsius higher than the baseline temperature of 1850-1900 or pre-industrial levels.
- In 2022, it was 1.15 degrees above the baseline, and by 2027, the average will exceed 1.5 degrees, a critical point beyond which there may be no return.
The 1.5 degree Celsius target?
- The 1.5 degree Celsius target is the global climate target that aims to limit warming to said level by 2100, in order to prevent the planet from slipping into further climate crises.
- For decades, 2 degree was an acceptable level of warming. T However, the 2 degree target was unacceptable to small island countries as it implied that their survival was compromised.
- In 2010, at the Cancun COP16 , countries agreed to limit the global average warming to below 2 degree Celsius.
- In 2015, the parties to the Paris Agreement pledged to limit the average temperature rise to below 2 degree, while actively aiming for 1.5 degree above pre-industrial levels.
- This was endorsed as a global target by the Intergovernmental Panel on Climate Change (IPCC) in 2018 and since then has been pursued in all climate dialogues.
Criticality of 1.5 degree target critical
- In 2018, the IPCC released a special report on the impact of global warming when temperature reaches 1.5 degree Celsius above baseline.
- Frequent and intense heat waves, droughts, heavy precipitation, an additional 10-centimetre rise in sea level, destruction of ecosystems and mostly irreversible changes can be witnessed at the 2 degree level.
- However, discussions on the average temperature rise do not imply that the current warming is uniform across the planet. For example, warming greater than the global average is being experienced in the Arctic, with the term ‘polar amplification’ gaining more traction.
Impacts of climate change
- Climate risks and hazards impact human population and the ecosystem depending on exposure, vulnerability, and adaptive capacity.
- It has exacerbated food insecurity, displacement, and deaths.
- Climate change has been affecting crop yield negatively and the risks posed by agricultural pests and diseases have also increased in the past few years.
- Countries like Ethiopia, Nigeria, South Sudan, Somalia, Yemen, and Afghanistan are facing acute food shortages resulting in malnutrition and hunger, demanding urgent humanitarian assistance.
- The heatwaves in Pakistan and India in 2022 also resulted in a decline in crop yields.
- The Horn of Africa (Ethiopia, Somalia, and Kenya) has been witnessing extreme drought conditions since 2020, while at the same time, western African countries are seeing floods and heavy rainfall which has pushed millions into acute food insecurity.
- Such shortage of food has also led to mass displacement within and across borders. In Syria and Yemen, thousands have been displaced owing to the floods, storms, and heavy snowfall.
- Aquatic and terrestrial ecosystems have also not been immune to such changes in climate patterns.
- The population of migratory species has declined in Sub-Saharan Africa.
- Additionally, the warming above 1.5 degree Celsius can prove lethal for coral reefs which are already prone to bleaching.
Impact on India
- India has been increasingly facing the brunt of climate change. February 2023 was recorded as the hottest month since record-keeping began in 1901. In 2022,
- India witnessed extreme weather events for 80% of the days. Indian monsoons were wetter than usual last year after recording extreme heat during the pre-monsoon period, resulting in wildfires in Uttarakhand and acute food shortages.
India’s Performance
- According to the Climate Change Performance Index 2023, India ranked eighth with a high-performance after Denmark, Sweden, Chile, and Morocco.
- Being an emerging economy with development needs, it is attempting to balance its development needs with ongoing climate action both at the domestic and international levels.
- With domestic measures like the Green Hydrogen Mission and the introduction of green bonds, India is performing fairly well despite contributing only a miniscule to cumulative GHG emissions.
- At the international level, through the International Solar Alliance and Coalition for Disaster Resilient Infrastructure, India can prove to be a responsible climate player keeping in mind that it has a long way to go in very little time.