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Still life in the ‘growth-to-value’ rotation?

Ed Monk, Fidelity Personal Investing, 17 July 2017

Is the case for the “growth to value” rotation that began in 2016 beginning to crumble?

Not according to Jeremy Podger, manager of the Fidelity Global Special Situations Fund, a member of our Select 50 list of favourite funds.

Speaking last week to fund data provider FE Trustnet, Mr Podger said that, despite a sharp reversal of gains for “value” stocks this year, there was still a strong case to be made for such stocks - although picking your sector will become increasingly important.

“Value has given back all of its performance and you can see that has happened region by region,” he said. “I would say, though, that this has been quite substantially sector-driven. If you look within the sectors at value stocks versus growth within the sectors, the value rally that we saw last year has not completely reversed in the way investors might think.

“I personally remain relatively optimistic and think that the value approach is very much legitimate at this point.”

Value - a rally waiting to happen

The setback for value stocks that Mr Podger refers to can be seen in the 2017 performance of value and growth indices. The MSCI World Growth Index is 11.9% higher in the year so far, versus just 4.2% for its value counterpart.

That will be a disappointment to those who have been made to wait for a value stock recovery, and who thought 2016 had finally seen its beginning.

A year ago there were signs that investors were at last about to turn away from highly-valued growth stocks. Up until then, the market sense had been that economic uncertainty, combined with the effects of ultra-loose monetary policy, would keep growth stocks in demand.

These companies tend to sit in defensive sectors that provide growth despite periods of economic slowdown. Most prized of all were the so-called “bond proxies” - those stocks that could boast a well-supported and growing dividend income for shareholders, come rain or shine. Stocks in the consumer staple sector were notable examples.

These qualities had been in even higher demand because yields from bonds were depressed by low interest rates and quantitative easing. Shares that could be used to perform the role of bonds - by paying dividends in place of bond interest - suddenly had a whole new army of potential buyers looking for an alternative to the bond market.

These factors combined to make some growth stocks very expensive. In contrast, those stocks with opposite characteristics had become cheap, “value” opportunities.

These were the “cyclical” stocks - those which did best when economies were growing and consumers were spending. Oil and banks stocks count in this number. With these companies - including some of the biggest corporate names in the world - looking so cheap, investors began to be tempted, and the rotation from growth to value began.

2017 - Signs of value optimism weakening

This year started well for the growth-to-value rotation, as recently elected Donald Trump reiterated campaign promises of higher spending on infrastructure and lower taxes that would, it was assumed, spur growth and inflation that cyclical stocks love.

Another support came from expectations of central bank policy. In the US, the Federal Reserve under Janet Yellen had begun raising rates and was signalling further rises to come, along with a path way for withdrawing QE. These things put upward pressure on bond yields, reducing their attractiveness and potentially removing one of the justifications for investors to turn to bond-proxies.

These supportive factors have begun to weaken, however. Donald Trump has so far made little progress on delivering his planned fiscal boost, and tightening monetary policy, while still on track according to the Fed, looks less certain because inflation has come in weaker than expected as the year has gone by.

A setback - but not an end - to the rotation

According to Mr Podger, the setback for value investing in 2017 may not be terminal. Inflation, he said should still see upward pressure from here, with economic indicators pointing to wage and price rises.

“The other thing to highlight in terms of that growth and inflationary backdrop is that, around the world, labour markets are looking tighter than they have done for many years,” he said. “This is particularly true in the US where unemployment is at a very low level; this is a level where we normally see some impact in terms of wage growth.”

He added that: “... I would say that looking around the world at general manufacturing indicators, these remain relatively robust.”

Five year performance

(%) As at 14 July 2017






MSCI World - Growth






 MSCI World - Value






Past performance is not a reliable indicator of future returns

Source: Datastream from 14.7.12 to 14.7.17 total returns in dollar terms


Value or growth style: An investment preference for shares which are lowly-priced compared with a range of measures such as earnings, assets or dividends (value) or shares of companies where the principal attraction is earnings growth (growth).

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Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Please be aware that past performance is not a reliable indicator of what might happen in the future. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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