News

Whether to invest in ‘growth’ or ‘value’ style in equity markets is an ongoing debate, with some participants focusing on one or the other. Evidence suggests that a flexible approach driven by the economic cycle is most likely to be successful.

When looking for ‘growth’ investors are looking for companies that will grow their sales or earnings faster than the economy or the rest of the market on a sustained basis. This includes smaller companies as they are often developing new niches or taking market share with innovative products or services. The growth sector also includes defensive sectors where earnings grow steadily year on year, regardless of the economic cycle. Sectors such as consumer staples, whose products are essential items regularly bought regardless of the economic cycle, are categorised as defensive, as are healthcare and pharmaceutical companies. Growth investing implies that valuations are either unimportant or are of secondary importance to investors; therefore these stocks can become very expensive.

Whilst there will always be opportunities for individual growth companies to outperform, at this stage of the economic cycle, when growth has been re-established and interest rates are expected to rise, it is common for leadership to switch to more economically sensitive companies. These are in sectors likely to grow earnings and profit margins at times of strong demand, when both volumes and prices are expected to improve. We have been raising our exposure to these sectors of the market over the past few months. For instance we have added to the financial sector where the large banks are looking inexpensive, as well as the large integrated oil & gas exploration and development companies.

So far this year there has been a clear rotation out of defensive sectors into more economically sensitive or ‘cyclical’ sectors, rather than simply out of growth and into value.  In the US in particular we are looking to move our positions to a more cyclical and value orientation, as we believe economic momentum will remain strong.