“Equally, in Europe the big growth managers – Jupiter’s Alex Darwall and Henderson’s Tim Stevenson – will start to suffer and the likes of John Bennett [also Henderson] will start to do better, as will cyclically exposed managers.
“The sell side are absolutely desperate for value to start outperforming again.”
His last point is particularly noteworthy, with the possibility that those talking up a return to value stocks, especially resources, are most likely being those investors with the biggest inventories to offload.
Still, it pays to be ahead of the curve and it is worth noting that value has historically performed well during periods of rate hiking. With its mature market and huge tech sector, US equities might be the obvious first port of call, particularly with the Fed having already initiated the first rate rise.
However, Nick Samuels, director of manager research at Redington, believes US equity valuations appear stretched on almost all metrics.
“If you need to invest in the US, a value strategy could outperform growth, but if there is no reason to be there it is best to look elsewhere,” he says.
“The picture is less clear in emerging markets. Some high-quality growth stocks in emerging markets – in the healthcare and consumer staples sector – are trading at valuations greater than many developed market counterparts.
“Dedicated emerging market managers have had to hide somewhere during the emerging market bear market, which has pushed prices up even further in quality growth.”
Emerging opportunities
Peters has also been keeping a close eye on the developing world, in particular recent performance of emerging market funds from the likes of Franklin Templeton and Lazard.
“You can also see it if you look at the very short-term performance of M&G Global Dividend, which is ticking up again with a large exposure to commodities,” he says.
With emerging markets too uncomfortable for some investors, Samuels sees opportunities developing in Europe and Japan.
“Expectations are for sluggish global growth for the next year or so, but if growth starts coming through better than expected in Europe, it could lead to a re-rating,” he explains. “It is very difficult to see US equity markets delivering another 10% to 15% return given the valuations, but this cannot be discounted in Europe.”
However, as one European equity manager makes plain, it does not always pay for investors to get het up about style biases in the region.
Element of surprise
Barry Norris, founder at Argonaut Capital, believes the outperformance of growth and value stocks is primarily linked to corporate profits, not quality or cheapness, and that any periods of outperformance are “purely coincidental with superior earnings momentum”.
“During periods of anaemic economic growth, for example, more often than not, only high-quality ‘growth’ companies are capable of generating the earnings growth upon which equity valuations are so sensitive, leading to their outperformance.
“By contrast, in periods of more robust economic growth, the average (or below average) company can generate profit growth, thus negating any reason to pay a premium for higher-quality companies, and leading to the outperformance of ‘value’ managers.”
Norris concludes that both growth and value managers are “equally deluded” and that taking an earnings surprise approach, as he does, demonstrates more consistent and superior outperformance.
Deluded or not, growth and value remain the most popular and comprehensible philosophies in equity investing. The tide may well be turning back towards value but the evidence for this remains scant for the time being, and good growth managers should adopt a pragmatic approach.
