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.

One of the hardest things about investing is keeping ahead of the game. By the time everyone is talking about a trend or theme, the market tends to have already moved on. The much-heralded rotation from growth to value (and perhaps already back again) may just be the latest example of this harsh fact of investment life.

About six months ago, something interesting happened in markets around the world. Around the time that the promise of Covid vaccinations became the reality, investors started looking seriously at recovery from the pandemic and who would be the likely stock market winners.

After years in which investors had found shelter in the shares of defensive growth-focused shares that promised earnings through thick and thin, they suddenly started looking at more cyclical companies, the ones that were likely to prosper in an economic upturn.

Some of these shares were precisely the kinds of companies that had suffered most during the pandemic. Travel, leisure, retail and hospitality companies. Banks and other financial stocks. Energy and industrial businesses.

The technology giants that had represented the apparent winners in lockdown, building on their successes in the sluggish growth environment since the financial crisis, were suddenly considered over-priced and vulnerable to a sell-off.

This rotation garnered plenty of interest from investors, and for good reason. In previous bull markets, just such a mid-cycle transition has often been evident. Smart investors were quick to bet that the transition to cyclical value shares was more than just a flash in the pan.

And they were supported in this assessment by investors in the bond market who, about the same time that value shares started to outperform, started to sell down their bond holdings too, pushing bond yields higher in anticipation of recovery leading to inflation and, in due course, rising interest rates.

But, as is so often the case, no sooner had this news filtered down to become the conventional wisdom than it became old hat. Around the beginning of March, the growth stocks started to get their own back. The S&P Growth index, which had underperformed the S&P Value index since October, started to edge ahead again. It has now recovered around half of the previous five months’ relative underperformance.

At the same time, the rise in bond yields started to falter. Having reached nearly 1.8%, the yield on the benchmark 10-year US Treasury bond, has now fallen below 1.6% as investors have started to see value in government bonds again.

This is the backdrop to the first quarter earnings season, which really gets underway this week. Last week belonged to the banks, which are traditionally first out of the blocks with their results. This week the focus broadens out with a range of companies reporting, including perhaps most interestingly some of the cyclical companies like airlines which investors have been backing over the past few months.

The numbers may be backward looking but the comments from companies about their future prospects will be scrutinised by investors for hints about the durability of the upswing. And whether the moment to back the recovery may already have passed.

Because everyone could see that the economy was starting to emerge from the pandemic, analysts went into this results season with high expectations. Retail sales growth in March was the highest for 10 months. House building is at a multi-year high. Profits in the consumer discretionary sector, in particular, are pencilled in at roughly twice the levels of a year ago.

Even so, the results so far have been exceptional. With around 40 companies reporting, something like 80% have beaten forecasts, many by a wide margin. On the face of it this should be good news for investors and, indeed, markets are flirting with all-time highs.

But look beneath the surface and something interesting is happening. The sectors that are beating expectations on the earnings front are failing to do so in share price terms. The bank index actually fell last week as the likes of JP Morgan and Citigroup announced stellar trading.

Why might this be happening? For the same reason that shares took off last spring when all around the outlook remained grim. Markets always look forward and it now looks as if investors have moved on from the current round of strong earnings to what comes next.

The market is starting to worry that rising costs could soon put pressure on company earnings. Once again, the durable earnings of those defensive growth stocks is starting to look attractive. And the cyclical earnings of the last six months’ favourites look a bit more vulnerable.

Now this concern may be premature. The experts expect the next couple of years to show strong economic and profits growth. But it does show that, like a good chess player, you need to be looking several moves ahead if you are to outwit other investors.

Realistically, most of us cannot do this successfully. Catching the transitions from one style to another, or the tops and bottoms of the market cycles more generally, is very difficult. And being even a little bit behind the curve can be extremely costly.

So, a better approach for most of us is to ensure that our portfolios are well-diversified across different assets, geographies and styles. We won’t be top of the performance tables with this approach but we will enjoy a smoother ride and sleep better at night.

When I unveiled my fund picks for 2021, I was acutely conscious of the shifting sands of investment styles. I sensed that the UK looked undervalued and unloved, but I was genuinely torn between the temptation to play that through a cyclical value-focused fund (Fidelity Special Situations) and a more defensive growth-focused option (Fidelity UK Select).

The beauty of fund investing is that you don’t have to choose. You can have your cake and eat it. So that is what I did, recommending both Special Situations and UK Select.

As it happens, Special Situations has the edge year to date. But who knows what the situation will be by the end of the year? I’m very happy with my decision to sit on the fence and have both funds in my picks for 2021.

Five year performance

(%) As at 31 March 2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
S&P 500 Value 18.7 7.7 5.9 -12.2 50.4
S&P 500 Growth 15.4 19.7 12.8 -2.5 59.4

Past performance is not a reliable indicator of future returns

Source: Refinitiv total returns as at 31.3.21, with net income reinvested in local currency.

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. Select 50 is not a personal recommendation to buy or sell a fund. 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. The Fidelity Special Situations Fund and Fidelity UK Select Fund use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Both funds invest in overseas markets to a varying degree, so the value of investments could be affected by changes in currency exchange rates depending on the exposure each fund has to those markets. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. 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 a Fidelity adviser or an authorised financial adviser of your choice.

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