Russell Harrop – Head of International Equities
It has been hard to miss the headlines around ‘value’ stocks versus ‘growth’ stocks. After years of value underperforming growth, a combination of vaccine roll outs, generous fiscal spending plans and concerns over inflation leading to higher interest rates, saw this reverse towards the end of 2020. Such a backdrop, according to theory, tends to favour lower quality, cyclical companies. Growth companies, in theory, should suffer as their longer-term earnings get discounted at a higher rate. Indeed, Q4 2020 was the first time in a very long time that value outperformed growth. Whilst value’s outperformance of growth picked up pace in Q1 2021, this has started to reverse in the last two months, with the MSCI World Value Index rising just 5% in Q2 2021 compared to an 11% rise in the MSCI World Growth Index over the same period.
Alphabet, parent company of search behemoth Google, saw another 21% increase in its share price in Q2 2021, and has added more than $500 billion to its market capitalisation so far this year. Just this growth is equivalent to five times the market capitalisation of Royal Dutch Shell, Rio Tinto or HSBC, classic ‘value’ stocks. The tech-heavy Nasdaq Composite Index rose 10% during the quarter, and the technology stocks in the S&P 500 Index rose 12% during the quarter. Many of the trends that provided a tailwind for growth stocks during the pandemic, remain in place. Despite a spectacular 2020, online businesses like Amazon and Zalando continue to dominate in 2021, with the former up 11% and the latter up 21% in share price terms in Q2 2021. It seems people are really catching-on to this online shopping trend.
Broadly, the US Index as a whole continues to perform well. The S&P 500 Index rose 9% over the quarter, compared to 7% for the MSCI Europe Index. In China, both the Shanghai and Shenzhen indices rose 4%. The main Japanese Index, the value oriented Topix Index, was the relative laggard, falling 0.5%, as rising COVID-19 cases with a less vaccinated population continues to hamper confidence.
In practice, we believe that the companies best placed to weather inflationary pressures are those with pricing power, and the ones best placed to face the rising cost of debt are those with less borrowing. As the saying goes "in theory, there is no difference between theory and practice. But in practice there is". The lesson is to avoid getting drawn into the headlines. What matters most of all is owning good companies that can compound over time, not whether one arbitrary style is more in vogue than another.
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