Hughes, head of fund selection at the online platform and stockbroker, said the biggest story in markets currently is the dispersion between value and growth stocks – a gap that has been driven wider by the explosive growth of tech companies over the last year.
He said growth stocks have had a “phenomenal year” while “value has been left behind”.
“You’re seeing this really big dispersion,” he added. “As a result, these ‘boring old companies’ are being left behind, be it banks or miners – they are priced like they are never going to make any money again and yet, they are good businesses which are profitable, so there is this huge gap widening between the two.”
Speaking to our sister publication Portfolio Adviser, Hughes cited online food takeaway service Just Eat’s move into the FTSE 100 two weeks ago as evidence of this growing gap, as it is now worth more than supermarket Sainsbury’s.
He described this as one of the “strange anomalies around at the moment”.
Hughes added: “Businesses such as Sainsbury’s and Tesco are still making profit, but investors appear to be losing interest in these stocks because of the exciting technology that they believe is going to grow forever – but it’s not going to happen.
“Trends in the industry are like an elastic band and currently, it’s very tightly stretched so when it snaps back, it will snap back hard.”
Hughes argued that historically when the gap between value and growth has widened, it “still eventually reverses and when it does, it does so really quickly”.
Just a bubble
Looking at 2018, Hughes predicts that “tech stocks will take a pause and the market will flip on its head because it’s just a bubble”.
“Investors will then be likely to look at those cheap, unloved and forgotten companies again, which will do really well, and the ones that have done well this year, will just tail off,” he added.
Advising investors to remain cautious, Hughes said that the trick for 2018 will be to remain diversified and not be greedy.
He added: “This looks like it will be the big picture, not just in the UK but everywhere. If you look at emerging markets, the top five stocks are tech stocks, in the US some of the biggest stocks now are tech and so everyone has voted on that.
“But when it reverses, it will be painful. If you are caught on the wrong side of that, it could really take away, so don’t be greedy.”
