Growth or value: How to navigate a two-speed world

Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Meanwhile in China 

The story could not be more different on the other side of the world. China’s economy is struggling, and we had plenty of confirmatory data on that this week. 

First, we learned that Chinese retail sales increased by just 2.5% in July, slowing from 3.1% in the previous month, and falling well short of a forecast 4.5% rise. Meanwhile, industrial production was up by 3.7%. Again, this was lower than the prior month’s 4.4% rise, and also below a forecast 4.4% increase. China’s consumer prices actually fell in the year to July, by 0.3% - deflation not inflation. 

One of the key drivers of the Chinese economy is the property market, and this week brought news that house prices in the country’s top 70 cities fell by 2.5% month on month in July. Country Garden, one of China’s biggest property developers, looks close to defaulting on its loans. According to Reuters, companies accounting for 40% of Chinese home sales have defaulted since 2021. 

Finally, and perhaps most worrying, the Chinese authorities decided this month to stop publishing data on youth unemployment, which had risen steadily to over 20% by the time of the most recently published data for June. The assumption is that the decision to bury the figures means they are not pretty. 

Reviving the growth vs value debate 

Knowing how to invest in this Goldilocks environment is not easy. In part that’s because a different investment approach is required for a high-growth, inflationary environment than for a low-growth, deflationary one. 

In a world where growth is hard to find, investors tend to favour companies that have a demonstrable ability to increase their profits consistently over time. This is the so-called ‘growth’ style. 

When economies are stronger and inflation and interest rates are higher, investors put more of a premium on capturing returns today than on the expectation of benefiting from growth in the future. Cheaper stocks, often providing a high dividend yield, are favoured in this environment. The ‘value’ style is in favour. 

So, what to do when one part of the world is hot and another is not? And when the chance of things reversing is quite high - remember that at the beginning of the year, most investors expected China to bounce back from Covid rapidly and for America to head towards recession on the back of higher interest rates. 

The answer, we believe, is to have a well-balanced and diversified portfolio. That means investing across different asset classes and regions, but also adopting a range of different investing styles. Holding both growth- and value-focused funds in your portfolio of investments will help to minimise the chance of being caught on the wrong side of the prevailing trends. 

Using the Select 50 

When we relaunched Select 50 a year ago, we worked with our fund selection partner Fundhouse to create a fund list that would help our investors to build this kind of balanced portfolio. 

In each of the equity categories on Select 50 we have tried to include both growth and value investment options. Unless you have a strong conviction that one of these styles is likely to outperform the other significantly, we believe there is a good case for holding both at the same time. 

Using the global category as an example of how this might work in practice, an investor looking to navigate the Goldilocks scenario we’ve outlined here might look at the following two funds: 

The Schroder Global Recovery Fund is a concentrated fund which invests mainly in developed markets like the US, Europe, UK, Japan and Australasia but also has some exposure to emerging markets. The managers are value investors, with a long track record of investing in this way. It is similar to another global value fund on Select 50 from Dodge & Cox, but invests more in smaller companies which could increase both the risk and returns of the fund. Fundhouse describes the Schroder fund as ‘deeper value’ than the Dodge & Cox option because it is prepared to own a ‘fair company at a good price’ rather than seeking out a ‘good company at a fair price’. 

A sensible fund to pair with the Schroder Recovery Fund could be the Rathbone Global Opportunities Fund. This is another relatively concentrated fund, which focuses more on developed markets. Again, the manager, James Thomson, has a long track record of investing in his chosen style. He is coming up to 20 years managing the fund. He looks for future winners, companies that can grow faster than the market consistently. This makes him an out-and-out growth investor and he is prepared to pay up for quality if necessary. The fund would blend well with the Schroder fund, but also with Dodge & Cox. 

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