Over the past several weeks the headlines have quite rightly been dominated by Russia’s invasion of Ukraine and the impact this has on the entire world.
In this space we have spoken at length about what investors can do to protect their finances and how they should approach any major investment decisions.
This week, I therefore thought it would be worth looking at the topic that was forefront of investors’ minds before the conflict started: tech.
Earlier this week Abraham Darwyne wrote that some 18 funds had lost more than 30% in the past three months. While the majority of the list were linked to Russia or eastern Europe, some were not.
Indeed, Baillie Gifford American, Morgan Staley US Growth and T. Rowe Price Global Technology Equity all made the list.
These funds have been under pressure since the end of last year when inflation soared, leading to expectations of higher interest rates.
Artemis’ Jacob de Tusch-Lec explained to Anthony Luzio this week that while this will not affect all tech stocks, it will hit those that are not yet profitable.
High-growth companies rely on future earnings expectations to justify their lofty valuations. So a forecast of £1 of earnings per share in 10 years’ time may look good while the real interest rate is zero and the discount rate is zero – as it will still be worth £1 in 10 years – but if inflation is at 5% per year over that decade, the earnings per share will be worth half.
So that’s the maths bit. The next bit is to make a decision on what to do about it. At present there is a value rotation, with investors dumping these tech names and buying formerly unloved companies that were good businesses but less appealing.
These market movements can go one of two ways. Over the past decade they have been short, sharp and swift, with value funds outperforming their growth rivals for weeks rather than months or years.
However, this is not always the case. In the aftermath of the tech bubble in the early 2000s, value stocks such as miners and oil triumphed as investors went back to old economy stocks.
Between 2000 and 2008, the MSCI United Kingdom Value index beat its growth equivalent by 21 percentage points and to 2010 it remained 11 percentage points higher – even as tech and growth stocks started to rebound through the financial crisis.
Between 2010 and 2020 the growth index beat its value counterpart by 28 percentage points as the roles reversed and investors enjoyed a spell of low interest rates and huge quantitative easing spending from central banks.
This is much starker when looking at global indices. Between 2010 and 2020 the MSCI World Growth index was 90 percentage points above the value index, yet between 2000 and 2010 value beat growth by 41 percentage points.
Whether this is the start of a decade-long shift towards value, or just another flash in the pan, investors will not know until many years down the line (and with the benefit of hindsight, which, after all, is always 20-20).
Those buying growth now could make strong returns, but it is by no means a guaranteed quick win. Similarly, all those panic-buying value stocks may be left wanting if the pace of recovery slows or the economic conditions of the past decade return.
Owning funds of both styles is likely the sensible move. Investors will miss out on some of the best days for either style, but will also avoid the worst.