The author of this article examines the "conventional" wisdom that value investing beats growth investing, and finds that claim is not backed up by evidence.
Are tech stocks therefore looking expensive and, if so, where else can you look for growth?
Firstly, it must be considered that tech looks expensive because of the opportunities it offers. Investors are paying a premium for potential future growth and outperformance. Growth investing as a concept defines that these companies must carry higher valuations.
There are, though, other growth-heavy sectors that provide an opportunity to invest at lower valuations. The consumer discretionary sector, with a P/E valuation of 18.7x, and communication services at 19.9x, look less expensive than tech but still provide exposure to a growth recovery when the global economy gets back to business as usual.
Although the leg down for markets has provided opportunities to invest at lower levels across the board, the question remains of how similar this recession will be to those that came before and therefore how reliable previous experience may be. Can history and economic theory be used as a reliable indicator of what the future investment environment is likely to look like post COVID-19?
Perhaps not if we take the global financial crisis as a comparison.
In the two years through 2008 and 2009 not only did growth outperform value, but protection in the downturn was provided by healthcare, consumer staples and information tech. Financials were once again hit hard (unsurprising given the cause of the recession), but utilities (defensive value) fell significantly.
Perhaps more important is what happened over the next four years as markets recovered. During this time growth outperformed value, tech outperformed utilities and consumer staples led the way as economies restarted and spending resumed.
Recent history, therefore, tells us that growth has outperformed value consistently. Whilst some growth stocks may look expensive, they have protected assets in the downturn and provide opportunities to invest at lower valuations and participate in the growth story when markets begin a recovery in earnest.
Therefore, the “conventional wisdom” we referred to at the beginning of this article, “value investing outperforms growth investing” no longer appears to be relevant or accurate.
At Bowmore Asset Management, in recent months and weeks our portfolio activity has been greater than usual to reflect the “new world”, seizing the opportunities that we are convinced will provide stellar returns in the future. For investors, now is not the time to sit still and rest on your laurels.
*Bowmore Asset Management Ltd is authorised and regulated by the FCA. Past performance is not a guide to future performance.