Will anything curb investor enthusiasm for U.S. growth and momentum shares?
So far, faster Fed tightening hasn’t. Rising trade tensions haven’t either. Growth shares, which typically rise faster than the market but offer no dividends, dipped during the first quarter’s turbulence. Momentum stocks—also outperformers, but often on weak fundamentals—saw declines too. But both segments have since outpaced higher-yielding ‘value’ shares. The S&P 500 marked a bottom on 2nd April and has since gained about 9%. But the tech-stock laden Nasdaq 100 had tacked on almost 16% by the beginning of this week. SPDR's S&P 500 Value ETF is up just 5% and negative for the year.
There’s no mystery behind the Growth-Value divide. An almost decade long rise by online titans is a big advert for Growth. Take Amazon, up 500% over 5 years. Note Netflix’s slide this week, on disappointing subscriber growth, clipped its 5-year burn down to ‘just’ 880%. See Facebook, up 700%. Then there are lesser-known stocks, like med-tech Abiomed. Its five-year 1,670% upsurge is the most eye-watering of all.
Not so plain sailing
Such protracted gains imply broad accumulation that has served investors well. But the risks are obvious. Trade tensions, the dollar’s grind and high valuations are stoking increasingly frequent volatility. As well, tightening regulations in Europe, and soon, probably in North America, will challenge the ad revenue models of groups like Facebook, Google, and Twitter. The exact impact of these and other new restrictions on such shares has barely been quantified.
Value at Risk for ‘Growth’
More broadly, Value at Risk (VaR) analysis is cautionary for growth-fixated strategies. We created a 27-stock portfolio biased towards fast-growing sectors like web services, streaming entertainment, biotech and others. According to MSCI analytics, it would face a bigger loss than the market in a bad month. A 10% S&P 500 fall would clip 13% of the growth portfolio’s value. SPDR’s Value ETF would lose just shy of 9%. Indeed, VaR analysis predicts bigger worst-case losses for growth strategies than value strategies. VaR data for both portfolios over the year to date are charted below.
Source: Thomson Reuters/City Index
A small chance for ‘Value’
If equity markets rebalance less drastically, a swing back to ‘Value’ implies opportunity to benefit from a return to more defensive, or non-cyclical sectors, like large industrials, consumer staples and banks. The market’s default position will not evaporate overnight though. All key U.S. indices reached a short-term top in recent days, but the Nasdaq 100 was narrowly ahead for the month with a 2% rise at the time of writing. The Value index had risen 1.5%. As the pace of technology sector earnings picks up, (for instance, Microsoft earnings are out tonight) high profile ‘beats’ are likely. These will fuel further advances at the high-beta end of the market for many more months yet.