In the second half of 2016, the improving global outlook saw investors finally pluck up the courage to buy value stocks. In the UK, this led to value companies outperforming growth companies by an impressive 13% over that period.
In 2017, somewhat surprisingly, growth stocks staged a comeback: in the US, they have outperformed value stocks by a staggering 17%, and in the UK, they have also outperformed although by a more modest low single digit percentage. What does this tell us? It may be a sign that the market is no longer quite so enthusiastic about the prospects for economic growth and reflationary policy.
Growth stocks could be set to keep outperforming their value counterparts
Experience tells us that the growth style tends to outperform the value style in periods of relatively moderate economic activity, as investors place a premium on those growth stocks with the power to grow their revenues and profits in a reliable way. With UK real economic growth forecast to moderate to just 1.4% in 2018, it looks like the environment should remain relatively supportive for genuine growth stocks.
In addition, a low interest rate environment tends to favour growth companies as future fast growing earnings streams are discounted at a lower rate. Yet despite seeing interest rate rises from both the Fed and the Bank of England in 2017, the long end of the yield curve hasn’t moved. This means the yield curve is flattening, which should continue to support growth stocks over value stocks, which prefer a steeper yield curve.
The technology sector remained an engine of growth in 2017
One of the best performing sectors in 2017 was a classic growth sector - Technology. There has been a lot written and said about the meteoric rise of the “FANG” stocks (Facebook, Amazon, Netflix and Google) in the US this year. Although Tech in the UK only represents 3% of the FTSE All Share Index, we have had a few notable success stories of our own especially in the IT infrastructure and IT security markets, with companies such as Softcat and Sophos comfortably outperforming the likes of Apple this year.
Airlines stocks stage a surprise take-off
One surprise growth sector in 2017 was airlines. The street was expecting double-digit earnings declines from British Airways due to the headwinds from Brexit, rising fuel prices and competition from budget airlines. But latest forecasts suggest that the company actually looks set to deliver double-digit earnings growth due to a far better pricing environment and improving industry dynamics.
For example, among the low-cost carriers, Wizz Air is growing strongly into the underpenetrated Central & Eastern European market and has swept up Monarch’s slots at Luton. And this is a powerful reminder that the concept of growth is highly dynamic, so investors need to constantly challenge their assumptions in order to access the best growth opportunities.
Ben Stapley is the portfolio manager for the JPM UK Equity Growth Fund.
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