This year has been very much a stockpicker's market. While over the past couple of years, it has bee...
This year has been very much a stockpicker's market. While over the past couple of years, it has been far easier to identify trends and themes within industries, this broad asset allocation-based approach has been far less successful this year.
Part of that has been down to the change in investor sentiment causing the rotations across sectors and markets. Within sectors, the broad themes have played out and investors have had to look at far more company-specific reasons why stocks will do well.
At the beginning of the year, many people conceded that equities looked expensive. That led to a focus on earnings visibility. The surprise over the last quarter has been that, even where investors have been reasonably clear on the nature of earnings from a company, some stocks have been punished as 'guilty by association' simply for being part of a sector where other stocks were under pressure.
Another issue this year has been what commentators describe as growth versus value. We believe this debate is missing the point to some extent what is more relevant to generating investment returns is about valuation and expectation. A number of defensive companies did very well through the first quarter but, at the same time, some of these stocks have recently suffered as valuations were questioned once more.
This shows that investing on simple value or growth characteristics is not necessarily going to generate the results you expect. Managers should not sacrifice owning high-quality names just for expediency in the short term.
When you talk about growth, people automatically assume you are talking about technology or pharmaceuticals. But it is quite possible to find some fairly traditional industrial companies that are perhaps more defensively positioned but are still genuinely growing their earnings.
Bear in mind that if the US economy slips into recession, then a company that is growing its earnings at 10% suddenly looks quite well positioned. Obviously not nearly as exciting as over the last two or three years, when unless a company's growth rate was shown at 50% or 60%, no one wanted to know.
Although we're reasonably comfortable with things as they stand for the rest of this year, the big concern is that people have deferred a lot of their expectation to the third and fourth quarter. Despite this, we're still seeing fairly robust earnings growth from a number of companies and we don't feel there is any reason to be overly bearish.
Expectations had tended to get ahead of themselves but they are probably more realistic now. A number of analysts' estimates have been coming down and it is important that they now find a level. In a number of cases, we're looking at stocks where a lot of the bad news is already priced in.
Stuart Paul is chief investment officer at Colonial First State Investments
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