The decade-long rally in growth stocks and the high valuations they now trade at might have some investors casting an eye at out-of-favour value stocks, particularly given the outperformance of the style in recent months.
“But, we would say be careful,” said William Davies, global head of equities and chief investment officer for Europe, Middle East and Africa at Columbia Threadneedle Investments, who believes that investors should hold back before piling into value stocks.
As the chart below shows, the MSCI The World Growth index has made a 266.52 per cent total return – in sterling terms – over the past decade while its value counterpart is up by just 168.34 per cent.
Performance of MSCI World style indices over the past 10yrs
Source: FE Analytics
Nevertheless, the length of the bull run should not convince investors that it has no further room left to run given the fact that conditions remain more conducive to growth in the near term.
“If we're looking at an environment where we see slow growth, low inflation, and low interest rates, that actually is an environment where we believe quality stocks or growth stocks should prosper,” he explained.
As such, Davies said that the asset manager continues to back growth stocks and one area in particular: cloud computing.
In 2016, he said, $220bn was invested in ‘the cloud’. This increased to $306bn in 2018 and 2020 should be “more or less double” 2016’s figure at more than $400bn.
“Who are the companies that benefit from that?” asked Davies. “Companies like Alibaba and companies like Microsoft or Amazon Web Services.
“These are companies that benefit from this trend, and this trend we do not believe is going to reverse short term.”
The growth style is likely to benefit from stable economic conditions with the threat of an imminent recession now behind us, according to the Columbia Threadneedle head of equities.
“If we look at what has occurred since September, the worst of our fears have not come to pass,” he explained. “We’d been observing our forward-looking indicators, which had been deteriorating until now, but – if anything – they have flattened off a little bit over the past couple of months.”
The asset manager’s in-house ‘recession probability indicator’, which typically signals a recession when it reaches 30 per cent, has struggled to get much near that level recently despite spiking at 24 per cent in September.
Recession Indicator
Source: FE Analytics
As such, Davies said that he does not believe a recession is imminent, but the readings do raise some questions about the health of the global economy. And some opportunities.
One key trend heading into 2020 is the growth of the middle classes around the world and in China, in particular.
In 2000, China, India and the rest of Asia collectively made up just over 10 per cent of the global middle classes. Now, however, they make up almost 50 per cent with China alone representing almost 20 per cent of the global middle classes. And it’s only going to continue rising, said Davies.
“What does that mean for us as investors?” he asked. “What that means is that this is an area where we believe that we will see consumption growing at a premium rate as we move forward – a long-term secular trend.”
Another demographic trend, he said, is ageing populations, which will present other investment opportunities in terms of later-life care and changing needs.
Yet, while Davies remains aware of the potential opportunities in China, the shadow of the US-China trade war continues to hang over the economy.
“I've been at Threadneedle since Threadneedle started and I've been a fund manager since 1985 and politics has always unnerved people,” he said. “But should it worry people more now that in the past? Maybe.
“We’ve got a lot of strong leaders around the world and don't necessarily get along with each other.”
The rationale behind Donald Trump’s pursuit of more protectionist policies becomes more apparent when you consider the breakdown of the two economies.
Exports make up $1.5trn of the US $20trn economy, “so around about seven per cent or so of US GDP is in exports,” he explained. Looking to China, however, exports play a much greater role at around 15 per cent.
“You could say, actually, the Americans have a stronger hand than the Chinese within negotiations,” he said.
“On the other hand, they may not because there's an election at the back-end of next year in November 2020. What the President does not want to occur is a recession in the lead up to that because as we've learned from the past [with elections], ‘it's all about the economy’.”
Nevertheless, in spite of the challenging backdrop brought about by the US-China trade war, there are still growth opportunities to invest.
“As we look forward, we can still find growth, we can still find growing companies, we can still find areas where we believe it's really attractive to invest,” he said.
“However, we [do] see quite a lot of tail risk around the world be it slowing economies or be it politics and so there are a number of factors which leads to uncertainty as we as we move forward.”
He concluded: “So, we think global economic expansion will continue, but it's going to be lower growth, lower inflation, lower interest rates.
“That actually is an environment where growth or quality – to our minds – should pay off within equity markets. And that is where we continue to be focused as we move forward.”