Investment updates • 3 min read
Initially thought to be transitory as we emerged from Covid lockdowns, the price increases now appear to be here to stay unless central banks take action, which is exactly what markets expect them to do.
This expectation has led to a style shift within investment sectors from what are known as growth companies to value companies.
A growth company is a company that is expected to perform well because it is growing fast.
Value companies typically have very little growth but are cheap to buy and often pay dividends. Think technology vs fossil fuels, tobacco and banks.
*5 year annual growth rate: 2016 to 2021
** P/E ratio is the share price relative to the company earnings per share and is used to assess how expensive a company is - a higher number means the company is more expensive and will take longer to pay back your investment from current earnings
When inflation is high, central banks respond by increasing interest rates which is exactly what is happening now. Higher interest rates can make growth more expensive as companies have to pay more to borrow money. In the near term, growth is therefore expected to slow and costs are expected to rise, impacting the profit forecasts of a business and therefore their share prices.
This means that many value stocks fall out of our investable universe as we will never invest in sectors like fossil fuels. In periods where growth companies underperform value companies we therefore expect to lag the market.
In periods of underperformance, it is important to stick to our principles and take the opportunity to maintain regular investing (which averages out the ups and downs of the market) such that it’s possible to benefit from lower prices. When styles shift back again, we will therefore have reduced our average start price to fuel further gains as share prices rise.
For portfolio specific performance details please see your monthly performance reports. Past performance is not a reliable indicator of future performance.