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Trade tremors deepen biggest stock dislocation in a generation
GROWTH is so precious in stock markets these days that a millennial stock picker can hardly remember the last time investors were so enamoured of it.
In Europe as in the United States, stocks promising high earnings and sales growth have hit a new record high relative to value stocks - newly dubbed a "widowmaker" trade for their persistent losses - in MSCI Inc. indexes going back to 1995.
There are good reasons for investors to bid up so-called growth stocks. As fears build over an interminable US-China trade war, a gauge of Europe's inflation expectations has plummeted to an all-time low along with benchmark German bond yields, benefiting long-duration assets such as stocks holding the promise of earnings outperformance and killing cheaply valued sectors such as banks.
For investors, it's a tug of war between a desire to find the companies more insulated from an uncertain economic outlook on one hand - and stretched positioning threatening a reversal on the other.
"The market may be extrapolating some of those growth stories too far into the future," said Ben Stapley, who oversees a growth fund at JPMorgan Asset Management in London. "The key is to avoid companies with high expectations of growth that then subsequently disappoint."
To add another lens on the value-growth gap: global stocks with high forecast sales expansion are now the priciest versus those with slower gains since the early 2000s, data compiled by JPMorgan Asset Management shows.
That spread mirrors the yield curve, which is inverting everywhere from the US to Germany and Britain. Just as economic fears are driving fixed-income investors to snap up long-end bonds for safety, stock pickers are favouring shares that promise increased earnings far into the future, rather than those that swing along with the macro cycle.
The extreme dislocations have befuddled strategists and investors alike who are schooled in mean reversion. For some, the implication is that they need to be more selective with both growth and value.
Stapley's fund focuses on companies with growth that beats expectations, rather than just those expected to deliver sky-high expansion rates. So LVMH and Kering, rather than the online retailers, for instance, he said. Even within utilities and energy, sectors not traditionally associated with growth, he's found attractive picks, such as Finland's Neste Oyj and Verbund AG in Austria, which both tap into structural trends in renewable energy.
Another dislocation has been underscored in recent days by Morgan Stanley: Europe's luxury shares, favoured for their faster earnings growth in recent years, are outperforming other quality stocks, despite the weakness elsewhere among Chinese proxies, suggesting a potential reversal, strategists led by Matthew Garman wrote in a note. It's an odd divergence because luxury depends heavily on its Chinese fans.
"European equity markets have been extremely bipolar," the analysts said.
Others haven't given up on value so quickly. No pain, no gain, as they say.
"With valuation spreads wider than at any point except for the few months after Lehman's collapse, the upside potential is clearly there," Societe Generale SA strategists led by Andrew Lapthorne wrote in a note. BLOOMBERG