Investing in defensive growth stocks is the wrong way to shelter from the uncertainty of equities, w...
Investing in defensive growth stocks is the wrong way to shelter from the uncertainty of equities, with traditional industrials likely to outperform going forward, according to Newton head of European equities Raj Shant.
Speaking at an intermediary roadshow in Newcastle last week, which also included speakers from Aberdeen, M&G and Schroders, Shant said the 20-year decline in inflation and interest rates that fuelled outperformance by growth stocks has come to an end.
'Defensives aren't always defensive,' he said. 'These are the very companies people are going to because they're nervous about markets. But they are the most dangerous sectors in the market for that very reason.'
Shant said even if future inflation is assumed to be stable, the best growth stocks can hope for is to retain their market rating.
'The risk is that their rating will start to whittle away. A de-rating of some of the biggest stocks would be a significant headwind for the market,' he said.
'There are going to be challenges to the market going forward but going into defensive growth companies such as food producers and pharmaceuticals is the worst thing to do.'
Shant said index funds are also relatively unsafe because the indices are dominated by the very stocks and sectors that re-rated during the last two decades of the last millennium.
He recommended investors move into those parts of the market that underperformed against growth stocks during the bull market, such as basic industries.
Through sector consolidation and more disciplined financial management, motivated by a determination not to be overlooked by investors any longer, industrials had transformed themselves into investment-worthy targets, Shant said.
'For 20 years, it was reasonable for companies to ignore basic industries,' he said. 'In every recession, most of them would make big losses. But after years of being denied access to capital markets, management started to focus on their return on capital.'
The return on capital offered by industrials has continued to rise since the 1990s, allowing them to pay dividends and buy back shares, two luxuries many growth stocks now struggle to afford.
Shant said the eurozone also offers substantial investment opportunities now indiscriminate fund flows to the US have begun to slow.
With some of the wealthiest economies in the world but relatively small equity markets, the potential for market development in Europe is immense, he added.
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