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There’s plenty to occupy investors’ minds over the remainder of 2020. Most you already know about - Brexit, the US election, local lockdowns, hopes for a vaccine, the nature and extent of government support, China’s bounce back, and so on. But lurking quietly beneath them all could be the long-awaited shift in favour from growth to value companies.
Since 2007, growth stocks have vastly outperformed value. The 13-year dominance of the growth style is more than three times longer than the longest comparable periods and about twice as long as value has ever outperformed growth. The size of the outperformance is much greater too. Could 2020, this strangest of years, finally be the catalyst value needed?
There’s a simple case to be made that growth is here to stay. High quality growth stocks have hogged the limelight over the past decade as investors have looked for defensive qualities in some of the world’s biggest corporate names. It’s perhaps no surprise markets stuck to these same growth stocks as virus volatility hit earlier this year.
The pandemic has overseen a meteoric rise in fortunes for some of these companies. Apple, for instance, became the first company in the US to achieve a two trillion-dollar valuation on the stock market in August this year. It took a mere two years for Apple to go from $1 trillion to $2 trillion, yet it took 42 years for Apple Computers, as it was back then, to hit the trillion-dollar mark in August 2018. You feel that a lot will have to change to slow such momentum.
Closer to home, consumer goods company, Reckitt Benckiser, today revealed that it expects its like for like revenues over 2020 to grow low double digits, up from previous guidance for high single digit growth. The company, whose brands include Dettol, Lysol and Durex, is a classic defensive staple, one that appeals to growth investors because it’s likely to deliver rising earnings regardless of what’s going on with the wider market. A positive outlook for Reckitt should translate to a positive outlook for growth.
If ever there were a year to upset the balance, 2020 is it.
Were economic growth to pick up, accompanied by a rise in bond yields and inflation expectations, the environment would look more encouraging for value investors, whose contrarian approach to stock selection should be aided by more favourable market conditions.
A vaccine could provide just the kickstart that economies and value investors are looking for. Defensive stocks would look far less appealing when consumers revert to old habits (and then some) and prop up cyclical sectors like retailers and airlines that are currently bearing the brunt.
Increased fiscal stimulus should help in the meantime. Governments across the globe have already pumped a lot of money into their economies to see them through the worst of the pandemic, and in most cases such stimulus has helped ease the initial blows. In the US, further stimulus is expected after the US election, especially if the Democrats take control of both the White House and the Senate.
Hopes for a vaccine and a Democrat clean sweep have prompted investors across the pond to bet that America’s recovery will force long-term bond yields higher. Long-term bond yields have been steadily declining for several years, indicative of a low-growth environment in which resilient growth companies look all the more appealing. Bets on rising yields bode well for value investors.
The outlook for interest rates comes in here too. If improving economic growth prompts a rise in rates, growth stocks could become less attractive with value names, like some of the big banks, benefitting.
Some will argue that now is the time for value to reclaim its place in the sun, others will say growth is here to stay. But one thing we can all agree on is that no one can know for certain.
As we head into these final months of 2020, holding a diversified portfolio with exposure to both possibilities is key. Keeping all your eggs in the growth basket could come back to bite you if value does rise, and vice versa - with exposure to both, you stand to benefit from the upsides while being protected against the downsides.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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