Sometimes I get tired of the debate between growth and value that is so prevalent in the US and seem...
Sometimes I get tired of the debate between growth and value that is so prevalent in the US and seems occasionally to take root over here as well. I find myself wanting to shout "its not growth or value, its growth of value."
But there is one set of economic circumstances where the distinction between companies that are mature and immature in terms of cash flows is likely to matter significantly.
That is one where there are significant secular trends in interest rates. It is hard to argue that the consistent decline in global long rates over the 1990s has not had a major impact on how we all think of value.
A recognition of the power of this impact may well lie behind the market's focus on what is currently happening to interest rates. For what it's worth my own views are as follows:
There has already been a big shift in market sentiment towards a belief that US and UK short rates are at or close to peaking. Fears on the potential return of inflation have been well overstated and short rates are likely to be lower in six months time than they are now
I would suggest that long rates are more important to value than short rates, and I would also suggest that the case for a major further decline in Western long rates is not so clear cut.
We remain strong believers in the new economy and anticipate much higher economic growth than normal, while the consequent changes work through.
However, this is also likely to result in fairly high demand for capital, and that should limit the scope for falling real long-term rates. It may well be the case that the major legs of the re-rating game have already been played out.
A corollary of re-rating arguments being less important should be that good stock-picking becomes more important. This is not often rocket science, and it does not work all of the time for all investors, but we continue to scour our stock universes for a combination of experienced and good quality management teams who have a clear vision of the future that we can understand.
Those who operate in industries where structure is likely to allow sustained and attractive returns and who have business models that are likely to allow sustained and attractive returns where we can buy those returns at an attractive price
Of course the stock market is hardly littered with companies that would fit all of those criteria. Unsurprisingly we find that great companies tend to have full prices, and in practice there is a degree of compromise on the first four factors in order to find investments that make good financial sense. We also keep firmly in mind that while we may have some guiding principles, what makes a difference is a lot of hard work.
Tony Willis is Lazard UK Income Fund manager
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