Hot earnings to keep fire under growth-stock rally
Thomson Reuters data, a trend that should continue to blunt concerns about lofty growth valuations.
“When you have an earnings recovery, growth stocks will outperform. When you don’t have good earnings, that’s when people are looking for value,” said Praveen.
Hopes for pro-business US policy changes under the administration of President Donald Trump will likely also keep expectations for economic growth elevated, helping to maintain the case for growth stocks.
“The value stocks have done okay but growth has done so much better in the anticipation we’ll see a pickup in economic growth,” said Paul Nolte, Portfolio Manager at Kingsview Asset Management in Chicago.
“Companies that are going to be more levered to economic growth tend to be growth stocks.”
“Right now I don’t see a long term condition for value stocks to outperform growth,” said Nolte.
To be sure, some strategists are less convinced that growth stock outperformance indefinitely.
While value stocks, which are cheaper relative to their earnings potential, have tended to do better in slower growth environments historically, JP Morgan Asset Management’s global market strategist David Lebovitz says that trend has been changing.
“It’s not going to be smooth sailing for one or the other. We think there’ll be times people are more optimistic about the economy and in those will continue cases, value can rally.
Then you’ll see periods where people are less optimistic about the economy, as we’ve seen over the course of the first quarter,” he said.
If economic trends look better in the second quarter, value stocks will do better, Lebovitz said.
In Asia, the MSCI AC Asia ex Japan growth index, is up 18.5 per cent so far this year, compared with a 12.6 per cent gain for the comparable MSCI value index.
Investment in India, traditionally a growth-driven market, has adjusted in recent years as value stocks have narrowed the gap with growth, which still lead, said Jayesh Shroff, cofounder of investment advisory Cask Capital in Mumbai.
“That is because people were paying a premium for growth and somehow the growth did not materialize.
That’s why value came back and growth has taken a slight back seat,” said Shroff.
Still, he said as soon as growth returns, he expects investors to switch their focus back from value.
In China, between 2009 and the 2015 stock market crash, small-cap growth stocks were the market’s darlings, but “a new rotation into value blue-chip investments started in 2016,” according to Zhou Liang, fund manager at Shanghai Minority Asset Management Co.
“In 2017, money will flow into blue-chips, as small-caps weaken and lose their lustre,” said Zhou.
In Europe, the best outlook for corporate profits in seven years has ignited investor appetite for growth stocks, which are now up twice as much as their value counterparts so far this year, a reversal of the trend seen last year.
As a result the MSCI International Europe growth Index has jumped 8.9 per cent this year so far, compared with a 4.5 per cent gain for the MSCI International Europe Value index.
With such a big gap between US growth and value stocks, some investors are eying overseas investments.
“The entire US market is very expensive. Value investors definitely don’t like to chase expensive valuations,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
“I wouldn’t expect to see a rotation until you saw a correction where both stock types are lower.”