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.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.