Growth stocks are now outperforming the value style over 2021 so far, as doubts over the robustness of the global economy sent investors back into more defensive areas of the market. 
Value stocks – which investors had been avoiding for much of the past decade – rallied hard when effective Covid-19 vaccines were first announced in November 2020 and had been outperforming growth for much of this year as well.
However, as the chart below makes clear, the growth style has been much stronger than value over recent months. Indeed, at the time of writing (10 September), the MSCI AC World Growth index was just outpacing its value counterpart with a total return of 15.7% versus 15.2%.
Performance of growth and value stocks over 2021
Source: FE Analytics
Investors have returned to growth stocks – which tend to be more defensive and hold up better when the economy is weaker – over the summer months. FE Analytics shows the MSCI AC World Growth index is up 12.1% since 1 June while the MSCI AC World Value made just 2.4%.
The following chart shows how this rotation back into defensive areas of the market has looked at a sector level, with tech stocks jumping 16%, healthcare 10.8% and utilities 7.3% since 1 June. More cyclical areas, such as value-heavy sectors like energy and materials, failed to make any ground over the summer.
Performance of global equity sectors since 1 June 2021
Source: FinXL
This preference for more defensive stocks over cyclicals is down to investors expecting economic growth to moderate from the very high levels seen at the start of the year, when lockdown restrictions were eased and countries such as the US and the UK began to move back to normality.
The August edition of the Bank of America Global Fund Manager Survey found “global growth expectations have fallen drastically” among asset allocators, with a balance of just 27% of fund managers expecting the global economy to improve over the coming 12 months.
Concerns that growth has peaked have come at the same time as the rise of the Delta coronavirus variant, slowing growth in China and disruptions to the global supply chain, which all add to worries about the health of the global economy,
John Surplice, head of European equities at Invesco, said: “We are not entirely surprised by the market’s reaction, as it was only natural that the very high rates of growth coming out of the pandemic would begin to lose altitude. However, where we may differ most is that we don’t believe growth rates will inevitably slow to the anaemic levels of the past decade.
“Many actions taken during the pandemic will remain with us for a long time, underpinning growth for years ahead. Some crisis related stimulus, such as furlough schemes, will end but others have a long way to go. The EU recovery fund, for example, will provide grants and loans until 2026.”
Surplice’s portfolios – such as the £2.3bn Invesco European Equity fund – tend to have more exposure towards cyclical and value stocks over growth and quality names. He believes the recovery trade has much further to run.
Some of the reasons for this include the fact that recovery in the services sector (which is much larger than manufacturing) is only just starting its own rebound, an improving earnings recovery and opportunities in long-term structural themes like climate change and digitalisation
“If we are right, this should be the start of a prolonged period of earnings growth – even more so for shorter duration assets like value. This is something we haven’t seen since the 2003-2007 period, which translated into very strong returns for these types of stocks.”
Not all are convinced, though, as evidenced by the recent pull-back from value.
David Coombs, head of multi-asset investments at Rathbones and manager of the £1.5bn Rathbone Strategic Growth Portfolio, continues to focus on growth stocks despite the high valuations that many trade on, especially in the tech space. He does not have too much interest in shopping around in the very cheap end of the market.
“We know the best-quality companies are expensive right now. I’m not going to try to defend this. No new paradigm chat. However, they could remain expensive and increase in price with greater sales and smarter cost cutting for another couple of years or more,” he said.
“I don’t want to sell these sorts of companies to replace them with lower-quality or low-growth names. We are long-term investors. We aren’t buying highly indebted or unprofitable businesses valued on a price-to-sales basis. That tends to end badly when sentiment shifts.”
But alongside growth stocks, the manager has been adding to cash in recent months as it seems to be “the only safe option” as well as holding put options on stocks as a form of insurance.
“It’s not the time to go all in,” he finished.