Growth has made a comeback this year.
Year to date, the top three indices out of the MSCI, FTSE UK, and Russell 1000 and 2000 Growth and Value indices are all growth, with the large-cap US Russell 1000 Growth delivering the best return (see chart 1). That’s a reversal of fortunes compared to 2022, when it was the worst performer of the group, falling 20.2% over the year. In contrast, the FTSE UK Value index delivered the best returns for the year, at 8.8%.
Chart 1: World, US and UK – Value v Growth, year to date
Source: Refinitiv Lipper
Last year’s rising rates were to no small degree responsible for driving a coach and horses through growth stock returns, as the market focused on current earnings rather than future growth expectations. However, even though rates remain elevated when compared to the first two decades of the century, growth stocks have bounced hard. That’s a bit counterintuitive, as this isn’t an environment when growth stocks should be thriving.
Tech rebounds
The recovery of tech stocks has been at the core of this growth rebound. Meanwhile, despite the elevated profits of oil and gas companies, energy funds haven’t had the runaway success they enjoyed last year (chart 2).
Chart 2: Lipper Equity Sectors, IT v Energy, YTD
Source: Refinitiv Lipper
Over the first four months of the year, Apple and Tesla rose more than 30%, Alphabet returned 21%-plus, while Meta more than doubled. However, despite all the talk of the tech rally being driven by investors piling into tech giants on a wave of enthusiasm over AI, the six top performers in Lipper’s Equity Sector Information Technology classification year to date are all ETFs specialising in blockchain, returning between 85.8% and 21.8% over the first four months of the year. Only after then do we see funds stuffed with Apple, Meta, Alphabet and the like appearing in the rankings.
What’s also noteworthy is that the top eight tech funds are all passive—although, to be fair, this classification contains a plethora of ETFs tracking very diverse tech indices, from crypto to semiconductors. The days of passive tech investing consisting of buying a Nasdaq tracker are long gone.
This diversity is also reflected in returns, with a number of funds investing in cybersecurity and e-commerce in negative territory year to date, despite the former being a hot-button topic.
Going with the flow
The tech recovery has been reflected in flows. Last year, UK registered for sale funds in the Equity Sector IT Lipper classification saw outflows of £5.2bn, while Equity Sector Energy, chock full of funds with all those market-leading oil and gas stocks took (all things considered) a relatively modest £765m. The first four months of this year saw those flows reverse (to £763m and -£1.06bn respectively). While much of the former is going to quite generalist tech funds, Xtrackers Artific Intelligence and BigData UCITS ETF and the Allianz Gl Artificial Intelligence A-EUR have taken £155m between them, so there is some interest in specific AI plays. Unsurprisingly, given their role in AI, there are a lot of familiar big tech names in these portfolios.
Nevertheless, the tech rebound (and so to that of growth) may prove fragile: it could be some time before rates come down, and I’m sceptical as to whether rate rises are the right tool to check inflation in this environment—especially when, by some estimations, US demand is not above trend—unless indirectly, by hastening the blunt, unwanted instrument of recession.
In addition, the longer rates stay elevated, the longer the cost of capital will stay higher, and that should be bad for growth-oriented companies. In addition, concerns over tech stock valuations remain, despite last year’s steep declines. This year’s recovery is unlikely to allay such concerns.
However, as Keynes said, the market can remain irrational longer than you can remain solvent. I remain curious regarding this aspect of the market, if unconvinced as to how firmly grounded it is.
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