For quality growth managers, January was as tough a month as it gets.
A toxic combination of rising interest rates, ever worse inflation figures, military build-up on the Russo-Ukrainian border and a few poor company earnings reports triggered a near panic in ‘growth’ stocks, battering the tech-heavy NASDAQ index, ending the month -9%.
The UK market, with its heavy weighting in big oil, tobacco and financials, was rather sheltered from the shock. The FTSE 100 was +1.1% and the less familiar FTSE Higher Yield index was +4.2% (probably the best performing indices in the world, over the month). The index is constituted of the big oils, utilities, high-street banks and tobaccos, all sectors we are considerably underweight in.
Commentators have been labelling this market move as the next ‘Value Rally’. The contrasting shift into these ‘value’ stocks led to a big reversal of fortune between rising oil, tobacco and bank stocks and falling quality growth companies, which we favour. We like to think that this is a rare event, which will unwind before long. Recent reports from Diageo, LVMH, Microsoft, Google, which have been excellent, go some way to reinforcing this view.
Over a 30-day lens, stocks such as BP, HSBC and British American Tobacco have risen sharply, whilst our core portfolio holdings (e.g. Halma and Spirax-Sarco Engineering) have headed in the reverse direction. We see this as a buying opportunity in these quality growth stocks, which are in the January sales, many with up to 25% off. They are growing organically, with strong underlying revenue growth, profitable with accretive margins and in the majority of cases, cash on the balance sheet. Please watch our “UK Equities: Will the value rally last?” webinar for further discussions on the topic.
Over the course of the year, we expect UK and US base rates to increase steadily, accompanied by a gradual unwinding of all the support that bond markets have had from central banks’ QE programmes. Economic growth looks set to continue, so we regard the return of interest rates to more ‘normal’ levels as a good thing. Inflation looks set to peak over the first few months of this year, but energy prices remain a concern and much is dependent on a diplomatic solution in Ukraine, and it seems to be unlikely that inflation will be back at central bank targets any time soon. Importantly, through the inclement environment, the underlying companies in our portfolios are still delivering strong results and increasing profits, a crucial metric for us.
The bumpy ride is likely to continue…
The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.
Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.