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Bubbles and acronyms go hand in hand

David Jane, manager of Miton's multi-asset fund range, explains how it has diversified away from the reglation trade into more thematic ideas.

David Jane

By David Jane, Miton Asset Management
Monday June 19, 2017

This year, almost 30 per cent of the return from US equities has come from just seven companies, the FANGs (Facebook, Apple, Netflix and Google) plus Amazon, Microsoft and NVidia. This is part of a much wider trend, which has led to the invention of a new stock market acronym – Japan now has the SNRS or ‘Sunrise stocks’ (Softbank, Sony, Nintendo and Recruit).

At the start of this year, we focused on diversifying away from the reflation trade into our more thematic ideas. This involved increasing exposure to growth themes, such as consumer internet, healthcare and industrial technologies globally, to balance the more ‘value’ type macro themes such as banking, resources and materials.

Over the course of the year, there has been a huge rotation away from the economically sensitive sectors into these ‘growth’ names, reflecting a broad stabilisation of the economic data as opposed to the acceleration seen in the latter part of last year. This, combined with falling bond yields year to date has meant that ‘growth’ has been strongly preferred over ‘value’.

The increase in these share prices this year has been driven by valuation as much as earnings growth, which makes them vulnerable to a return to the rising bond yield trend we saw in the second half of last year. During that period, ‘growth’ stocks lagged, so perhaps they are as much bond proxies as the consumer defensives and pharmaceutical stocks which did so well during the ‘lower for longer’ period.

We have been asked a lot of questions recently regarding whether these ‘growth’ stocks are in a bubble and, therefore, whether the market is building towards a substantial fall. Stock market bubbles have certain characteristics, most particularly a period of accelerating returns. This can be seen by considering the Tech bubble of 1999-2000 or the more recent Chinese equity bubble.

Source: Bloomberg

The mood in these bubble periods can also be characterised as irrational exuberance, leading to capital misallocation. The recent move in the FANGs and similar names is substantial, but it hasn’t shown these characteristics.


Source: Bloomberg

So, while it’s possible to make an argument for overvaluation or for rotation into other areas, the argument that the stocks are in bubble territory is weak. The rise has been steady, but not accelerating. Clearly, this may change and we may enter the period of irrational exuberance, but right now we would not be panicking.

That said, we have been rebalancing the portfolios in favour of better ‘value’ areas of late, trimming our high P/E growth names and rebuilding positions in the laggards like banks. While we don’t know what the second half of the year holds, and the trends of the first half are as likely to accelerate as they are to reverse, we feel the balance of risk is that accelerating earnings growth combined with low valuations may bring the cyclicals back into favour.

From a risk management point of view, diluting and diversifying our exposure to ‘growth’ companies, rather than exiting altogether, seems to be the right thing to do. Longer term, however, the underlying growth drivers for these industries remain very powerful, so we do not doubt beyond near term volatility that they will persist longer term.

David Jane is manager of Miton’s multi-asset fund range. The views expressed above are his own and should not be taken as investment advice.


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