Value stocks still the best place for investors over next six to nine months but time for growth stocks getting nearer, says HSBC's chris rice
Value stocks will remain the best place for investors' money over the next six to nine months but the time for a return to growth companies is getting nearer.
Chris Rice, head of European Equities at HSBC Asset Management, said value stocks have had a superb run. Since 1999, they have nearly doubled in relative terms against growth stocks.
While this has followed a period of big underperformance relative to growth stocks during the technology boom, value shares have made up almost all of the lost ground, according to Rice.
He said: 'P/E ratios on European growth stocks have historically been twice those of value shares. That ratio rose to 5:1 during the late 90s but has come back to 2:1. Nokia, for instance, is now rated below Diageo.
'Growth companies also usually do well when short-term interest rates rise. While this may be put off this year because of nervousness about the strength of any global economic recovery, the rises could come through in early 2003 and that will be when growth becomes a story again.'
This time, though, Rice argued, it will be different companies and industries from tech, media and telecoms that will offer the best growth prospects.
In February 2000, at the height of tech mania, software, technology hardware and insurance were the strong growth sectors, while materials, food and beverage and autos were the value plays, said Rice.
Now the same screening process points to software, food and beverage and energy as the growth sectors and materials, autos and capital goods as the value markers.
If, for example, growth is defined as twice the average earnings, oil becomes a growth sector. There is more pain still to come in the technology sector, said Rice. Betas on tech shares are still in the 2-3 range and the historic trend is for betas eventually to return to one.
This influence of technology on investor thinking is one reason the stock market has not yet responded to the clear signs of economic recovery, said Rice, especially as the US downturn increasingly looks like a classic manufacturing cycle that is now turning up.
'Strong economic first quarter figures coming through reflect inventories being rebuilt and should lead the cycle upwards,' he said. 'Consumer spending is holding up well, especially compared to previous downturns. But high market valuations still pose a problem to a sustained recovery.'
While European equities look good value relative to other markets, on a historical comparison the outlook is not so exciting, he said. 'Most recoveries in previous recessions have started from P/E ratios of 12-15 and price to sales ratios of 60%. The US market still sits on a P/E ratio over 20. Earnings recovery could also take longer to come through than people think with 2003 rather than 2002 likely to produce the big move upwards. European mid-caps are the best way to take advantage of this, said Rice.