Value stocks are expected to continue outperforming growth stocks in the third quarter. Since the...
Value stocks are expected to continue outperforming growth stocks in the third quarter.
Since the technology bubble burst, value has come to the fore as the most rewarding investment style, and opinion is divided on whether growth sectors will rebound later this year.
Richard Brody, manager of the Prudential North American Trust and Scottish Amicable American Trust, is running his portfolios with a value bias and believes the style will prevail in the long term. He says: 'We have seen the unwinding of the bubble that occurred in some growth stock sectors but we are now getting closer to a normal environment. Value will continue to outperform.'
Terry Ewing, head of US equities at Britannic Asset Management, has started to increase his weightings in growth sectors, believing that the market has hit a trough. Although concerned about the weakness in corporate earnings, he draws parallels with 1991 and 1992, where a similar scenario met with strong growth.
He says: 'The outlook for earnings has deteriorated, but a lot of the bad news has been factored into the market and inflation is under control. In 1991 and 1992, corporate earnings fell by 30%, but the market rose in both those years, as it looked to the future. That is where we are now.'
While not expecting a V-shaped recovery, Ewing says he expects third-quarter growth to remain flat but anticipates a pick-up in the fourth quarter. He says old economy stocks will outperform, with telecoms and technology proving to be laggards because their inventory problems will take longer to work through.
The wider market may offer some pleasant surprises in the form of earnings upgrades by early next year, adds Ewing. He notes that the market is still to realise the benefits of the Bush tax cuts and consumer tax rebate, which could also help boost GDP growth in the fourth quarter.
While only $590 on average per household, the tax rebates are likely to maintain consumer spending levels and possibly spark further expenditure, if used as down payments for higher value goods, says Ewing.
He is also bullish about the property market and, while unemployment is rising, there are still more people in work than ever before. Ewing says: 'The housing market is robust and the consumer is much more exposed to the property market. This reflects that there is net immigration into the US and not enough housing.'
Confident of a fourth quarter recovery, Ewing has been increasing his weightings in semiconductor stocks as he looks to benefit from the upside of the cyclical sector.
Brody has moved overweight telecoms, but on a value rather than growth play, and is continuing to avoid the incumbents and wireless operators. He says: 'The telecoms sector in the US is still expensive, but if you look at some of the old, local operators they offer attractive opportunities. We are overweight the sector but underweight wireless, long distance and telecom equipment firms.'
Brody is bearish on financials and notes that little value can be found in the sector. He therefore holds an underweight position in the sector.
• Possible fourth quarter turnaround.
• Consumer tax rebates positive for GDP.
• Value available in certain telecos.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation