In the midst of extreme market turbulence and volatility, is now really the time to invest in growth...
In the midst of extreme market turbulence and volatility, is now really the time to invest in growth stocks?
Growth stocks have outperformed since summer 2007. Prior to this, we witnessed the underperformance of growth stocks for some seven years since March 2000, and, in the current economic climate, it is unsurprisingly difficult to see how they can continue to perform well.
But this is where we need to take a closer look at what is really going on in the growth universe.
In fact, there are a number of positive events unfolding that suggest the outlook is more positive than many might think.
The bottom line is that there are a number of strong companies out there, such as L'Oreal and Danone, which continue to report strong figures and should continue to outperform over the long term despite possible short-term disappointments.
Looking back once more, we believe that if the historical developments in the US stockmarket are taken as a guide, there is a high probability that growth stocks can continue to outperform.
If we look back to the last major growth 'bubble' (i.e. the period before the technology boom), which brought about the 'Nifty 50 bubble', which went on to burst in 1973, we subsequently saw value outperform for the next five years. Thereafter, growth stocks had a tremendous six-year run, not peaking until late 1983. We believe that using this as a guide, the current movements in the market should mark the beginning of some exciting new developments.
Another good example to look at is the bursting of the leveraged buyout (LBO) bubble in 1989. This started a three-year period of growth stock outperformance, but during this period, many investors discovered that buying cheap cyclical stocks and leveraging heavily is not always the best way to make money, which led to a reassessment of risk.
In today's market environment, we see market participants once again reassessing risk. The market is repricing growth stocks that are able to demonstrate high, growing free cashflows, as it did in the period between 1989 and 1992.
So what positive conclusions can we draw from the current, extremely challenging market conditions? While we believe that the overall outlook for growth stocks remains positive, we see low valuations within the market clearly reflecting uncertainty about the global banking system and credit market, and concern about the outlook for economic growth.
The credit turmoil is going to have a substantial impact on companies' earnings, and for that reason, we expect to see substantial earnings downgrades over the next 12 months or so. But above all, it is key to highlight the fact that, at the moment, the crisis is primarily a confidence crisis.
- By Dirk Enderlein, director and senior fund manager of the Allianz RCM Europe Equity Growth & Allianz RCM Euroland Equity Growth funds
- Many growth stocks still show positive characteristics, despite the market environment
- A look back at history suggests growth stocks can continue to outperform
- At least for now, the current crisis is primarily a crisis of confidence.
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