However, the stock market has underperformed – in other words, the market has derated.
The value in certainty
As we move into a more uncertain world, with growth slowing and stimulus measures having less of an impact, certainty will continue to be fashionable.
As we are late in the cycle, the willingness to pay whatever price for certainty will not be the same as a few years back.
Stocks that have bumps in the road are being punished severely – those that just churn out the numbers have been strongly rerated upwards.
Does it make sense going for the high multiple stocks today, knowing that if they disappoint in a quarterly update they will be punished?
If the growth value tilt is shifting, does that mean the likes of Fundsmith Equity, Blue Whale Growth and Lazard Global Franchise – all quality growth funds – will start to struggle as the higher multiple means more certain growth stocks become riskier?
Or can you actually buy good growth at a reasonable price? Interestingly, Lazard’s top 10 holdings trade on a price-to-earnings ratio of 16.9 and a price-to-book ratio of 2.2 – both lower than MSCI World.
Blue Whale’s portfolio trades on a PE of 30, but trumping the lot (no pun intended) is Baillie Gifford’s US fund, which has an eye-watering PE of 90.
Growth at any price seems more appropriate there.
I am not knocking any of the approaches mentioned, and I am a happy holder of Blue Whale Growth, but surely valuation has to matter.
If missing results by a few percentage points can worry investors enough to knock10 per cent or more off the current share price, and the world is slowing, that will become more commonplace.
Is there going to be a proper resurgence in value?
Without interest rate increases that seems unlikely, and rate rises are not on the cards due to the sheer amount of debt sloshing around the global financial system.
However, I think the price paid for growth will become more discerning and there are pockets of value that could see recovery.
For example, if there is some form of Brexit resolution in the near future, the UK stock market could prove to be a good hunting ground, with domestically focused value stocks seeing a bounce as both UK and overseas investors take advantage of the current historically cheap valuations.
What I do not see is a continuation of the past decade, where the divergence in performance between growth and value has been so stark.
Fundamentals have to reassert themselves at some point, bringing the price paid for low-but-certain growth down, and the value in value stocks becoming more obvious.
