At the time of writing, growth and momentum plays dominate the stock performance charts. However, history suggests that it is rarely wise to expect the winners from one decade to provide the best returns in the next.
For instance, Japanese stocks were all the rage at the end of the 1980s but then fell from grace as the economy stagnated at the turn of decade. We saw it again when tech stocks bossed the 1990s only to immediately run into a major bear market that took over a decade to shake off.
The early 2000s saw investors favour commodity stocks and ways to play the Chinese economy, themes which did badly in the 2010s when tech ruled the roost once more. At the time, investors looked for secular growth stories almost regardless of price, thanks to an extended period of low GDP growth, low inflation and low interest rates.
Growth stock valuations are looking lofty once more, especially for tech stocks. But the question remains: what could persuade investors to shift from secular growth to cyclical value?
“Growth stock valuations are looking lofty once more, especially for tech stocks. But the question remains: what could persuade investors to shift from secular growth to cyclical value?”
Usually, share prices are upset by earnings disappointments that result from the arrival of a disruptive competitor or regulatory pressure. But this time around the biggest challenge might come from a different source — inflation.
Investors warm to growth stocks — and pay high multiples for them — because there is little reliable growth around. If government and central bank stimulus programmes designed to fight the virus do lead to an unexpected bout of inflation, cyclical growth will be just as easy to find as secular growth, if not easier. In addition, it will come at a fraction of the price.
Russ Mould has been the investment research director at AJ Bell since 2014. Prior to that, he was a fund manager at Scottish Equitable and an equity analyst at UBS Investment Bank. Prior to its acquisition by AJ Bell, Mould was the editor of Shares Magazine.
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