ASX value shares delivered better returns to investors than ASX growth stocks in 2024.
According to S&P Global, the S&P/ASX 200 Value Index rose by 9.19% in 2024. If you take dividends into account, the total gross return for 2024 was 13.68%.
By comparison, the S&P/ASX 200 Growth Index increased by 5.84%. The total return was 9.29%, including dividends.
ASX value shares are generally well-established blue-chip companies that have been around for a long time. They tend to deliver strong and reliable profits, which means they can pay higher dividends.
This can be seen in the 2024 results. ASX value shares paid a dividend yield of 4.49%, while growth shares paid a yield of 3.45%.
ASX growth shares represent a greater mix of companies.
Some are young start-ups that have yet to reach profitability and do not pay dividends. Their share prices are more volatile than value shares, and macroeconomic issues often have a more direct impact on their operations and financial health.
ASX growth shares can also be large, established companies that prefer to reinvest more of their profits for future growth instead of distributing generous dividends. Major biotech stocks are a classic example. They pour a lot of profit into research and development, which means they pay lower dividends.
Why did ASX value shares do better than growth stocks in 2024?
Higher interest rates and cautious investor sentiment likely contributed to ASX value shares outperforming growth stocks in 2024.
Higher interest rates reduce the present value of a company's future earnings. This adversely affects ASX growth stocks, which rely on future profits to attract investors.
Young companies also tend to carry more debt to fund their growth, so higher rates mean higher costs.
By comparison, blue-chip companies have already proven themselves able to cope with any economic conditions. They offer stable earnings and dividends, and these immediate returns make ASX value shares more attractive during periods of economic uncertainty.
As a general rule, investors in ASX value shares try to make money by purchasing cheap stocks and holding them until they return to normal valuations.
Martin Currie Australia's chief investment officer, Reece Birtles, said the valuation spread between cheap and expensive stocks widened last year.
In September, Birtles told The Australian:
A number of defensives are actually in that cheap category; that's what's very unusual.
Normally cheap are the risky (stocks) but at the moment safe is actually not expensive.
Birtles provided examples, including Telstra Group Ltd (ASX: TLS) shares, Brambles Ltd (ASX: BXB), QBE Insurance Group Ltd (ASX: QBE), and Orora Ltd (ASX: ORA). He also likes the look of ASX mining shares.
Birtles thinks an economic slowdown is on the horizon but the market is ignoring it.
He said while many companies reported solid earnings last August, some profits were being held up by expanding margins due to cost-cutting rather than increased revenue.
Many CEOs discussed economic uncertainty and were cautious about their forward guidance last season.
Birtles said shares like Commonwealth Bank of Australia (ASX: CBA) rocketed last year primarily due to momentum rather than fundamentals such as earnings growth.
He commented that share price growth based on momentum tends to create valuation risk in the marketplace. It also increases the gap between cheap and expensive shares.
This, in turn, provides opportunities for ASX value stock investors.
More examples of value stocks
S&P Global measures value stocks using three factors.
They are the ratios of book value, earnings, and sales to price.
The top 10 constituents of the S&P/ASX 200 Value Index by weight include BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and Fortescue Ltd (ASX: FMG) shares, which all fell in value in 2024.
Woodside Energy Group Ltd (ASX: WDS) shares, which plummeted 21% in 2024, and Woolworths Group Ltd (ASX: WOW), which fell 18%, are also on the list.
In an article published on asx.com.au, David Grace from the Australian Foundation Investment Co Ltd (ASX: AFI), says stretched ASX tech share valuations may prompt investors to seek value in mining stocks ahead of a potential cyclical recovery that may arise if China implements effective economic stimulus.
Grace adds that "2025 could see a year of renewed growth driven by broader participation across undervalued sectors", especially if the federal election result brings about more policy certainty.
