Page 22 - DIY Investor Magazine February 2018

GOLDILOCKS, TWO BEARS AND A BULL
ENTER BEAR THE FIRST
The pronounced performance of growth stocks at the expense of value stocks has
been a recurrent theme ever since value
stocks reached their peak in 2007, and a particular hallmark of 2017. In the UK market, it is typically expressed as the gap between consumer staples (the likes of Unilever, Reckitt Benckiser) and growth stocks (Sage, SSP) on the one hand, and value stocks (Barclays, BT and utilities and unloved domestic retailers) on the other.
Those with long memories will know that the last time there was a material unwinding of this growth/value skew was the bursting of the tech bubble in 2000-2003, where the rotation from growth to value was particularly vicious in nature and short in duration.
Of course, the conundrum for today’s investors is for how long can the current dispersion continue? And what form will it take? It might be that the dispersion unwinds slowly over time. It might also be that there
is no incremental buyer for value stocks. The clue’s in the name. Cheap stocks often remain cheap for a reason.
But that does not mean it won’t happen...
DIY Investor Magazine | Jan 2018 22
Richard Buxton, head of UK equities, tells his version of the classic 19th-Century fairy tale
For much of 2017, the stock market could have been likened to the character of Goldilocks, the little girl who, after some difficulty, eventually found her perfect pot of porridge. One that was neither too hot, nor too cold.
A combination of gently rising economic growth, buoyant labour markets and, to the surprise of many, low inflation has, thus far, translated into a global economy that appears ‘just right.’ China’s growth ticks along nicely, Europe is no longer the sick man of the world economy (Brexit- induced uncertainties aside) and US data point
to gently rising economic growth. But the question for many is this: for how long can the Goldilocks era continue?
As investors, we know that market-moving events can alter the temperature of the porridge at any given moment. How
will markets react to a shrinking of the
US Federal Reserve’s balance sheet? Is
the stimulus instigated by the Chinese authorities finally coming to an end? Is
the Phillips curve (the chart that plots the relationship between rates of unemployment and corresponding rates of inflation) dead, or temporarily buried? Inflation, after all,
is a key driver of bond markets, which
in turn drive equity markets. While these ‘unknowns’ hang in the balance, for now, let us return to the story line.
Please remember that past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back any of the amount originally invested. Exchange rate changes may cause the value of overseas investments to rise or fall. Issued by Old Mutual Global Investors (UK) Limited (trading name, Old Mutual Global Investors), a member of the Old Mutual Group. Old Mutual Global Investors is registered in England and Wales under number 02949554 and its registered office is 2 Lambeth Hill London EC4P 4WR. Old Mutual Global Investors is authorised and regulated by the UK Financial Con- duct Authority (“FCA”) with FCA register number 171847 and is owned by Old Mutual Plc, a public limited company limited by shares, incorporated in England and Wales under registered number 3591559. This communication is for information purposes only and does not constitute a financial promotion (as defined in the Financial Services and Markets Act 2000) or other financial, professional or investment advice in any way. Nothing in this document constitutes a recommendation suitable or appropriate to a