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Don't believe the hype

21 May 2021

Russell Harrop, Head of International Equities

The narrative in stock markets is too often a snappy headline to explain something complicated and nuanced that really defies an easy explanation. Or it’s wrong.

In the investment world bubble, it has been hard to miss the hyperbole around value (i.e. cheap and not-growing) stocks versus growth (growing and more expensive) stocks. After years of value being a dead dodo wiped out by the growth tiger, vaccine roll outs (if you are lucky enough to live in the developed world), and concerns over inflation have seen the dodo resurrected and re-evolving its wings and taking to the air.

And yet…

Alphabet, parent company of search behemoth Google, saw a 34% year on year increase in its revenue in the quarter to March 2021. It added a massive $14bn to revenue vs. the same time last year. That is what you call growth, so the stock itself must have had an awful time, I hear you say? Nope. Alphabet’s share price has risen 30% year to date. That is an additional $340 billion in market capitalisation!

And sure, mega banks, JP Morgan and Bank of America are well known value stocks and have risen +26% and +37% respectively over the same time period. Yet they were hardly down in the value doldrums before. Investors in both stocks would have seen investments increase by around a third in value if reinvesting dividends over 2019 and 2020.

One of the biggest surprises, or perhaps not, has been just how quickly demand for luxury goods has rebounded. LVMH the handbags-to-bubbly French conglomerate saw demand for its main Fashion & Leather Goods division rise +52% in the first quarter of 2021. Even with a lockdown-affected -10% the year before, that is 37% growth over two years. Uh-oh growth stock, it can’t have been pretty for the share price you cry? Think again! The stock has added a fifth to its market cap so far this year.

The lesson is to avoid getting drawn into the headlines. What matters most of all is owning good companies that can compound over time, not whether one arbitrary style is more in vogue than another. Over the longer term, it is hard, if not impossible, for any stock price to defy the growth (or not) of its underlying business. The future’s bright, the future’s nuanced.

 

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