For all the market noise, we don't believe the recent sentiment-driven style rotation to value stocks has changed the fundamentals of high-quality growth stocks.
After a difficult few weeks, it's only natural for the old debates between investment styles and longevity of economic cycles to resurface. Let’s not forget, we've had a decade-long run of ‘growth’ stocks outperforming value-driven stocks, while volatile periods inevitably lead the market to question whether growth investing has had its day in the sun.
In a period where we've seen a rapid recalculation of the appropriate price for risk assets, I would agree that the current market backdrop feels different. However, I remain optimistic about the potential future returns for equity markets. This bull market is old, yes, but that doesn’t mean it’s done.
Amid a backdrop of healthy demand, strong secular growth trends, robust M&A activity and still low costs of capital, the future looks promising to me. Meetings with corporate management teams also continue to paint a positive picture, which should provide support for earnings growth and momentum.
Let’s not forget that part of the reason investors rewarded growth stocks after the global financial crisis was because it was considered a scarce asset. The same is very much true now. There are still a low proportion of companies delivering attractive levels of sustainable growth. These types of businesses are underpinned by strong economic moats, sound management strategy and a focus on reinvesting cashflows for growth.
At this point of the cycle, I agree it is crucial to find a balancing act on valuations. It should not be a case of simply buying highly rated stocks without consideration to how they are priced by the market. While it is true that all assets have a price, perhaps the greater debate is whether value stocks simply got too cheap, as opposed to growth names becoming too expensive.
With a ‘growth at a reasonable price’ (GARP) mind-set, we favour companies with attractive growth fundamentals, where the market may have mispriced the potential for future returns. In a twist of fate, many growth names now appear more attractive, which could offer good opportunities.
Still, in light of current events, investing in growth companies amid market sentiment and expectations for a style rotation can feel like trying to swim against the tide. However, as long-term investors we can afford to be more comfortable with valuations, providing the growth profile, bottom-up fundamentals and quality characteristics of a business are compelling.
Looking ahead, growth names undoubtedly will be prone to market volatility. We have already seen this during several, albeit short-lived, periods in 2018. Yet, for all the commentary around market leadership change between growth and value styles, I strongly believe in the potential for quality growth names to continue to deliver for investors over the long term.
The sharp de-rating of equities has certainly felt more trick than treat in these past few weeks. But is it justified?