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“The big theme for 2006” will be a shift from value to growth investing, David Bower, Merrill Lynch’s chief investment strategist, told Tom Stevenson in The Daily Telegraph.
Recent surveys show that investors have had enough of getting endless cash handouts, whether from dividends or share buy-backs. Now they want to know that corporate UK is investing in its own future, and hence ensuring that it will be able to pay out cash in the future.
In the five years to February 2005, the FTSE low-yield index (filled with growth-orientated firms) fell 42%, compared to the FTSE high-yield index, which was up 50%. But in the last year or so, the numbers show how sentiment has changed: the low yielders rose 24%, but high yielders only managed 20%.
Perhaps not unconnected to this switch in investor sentiment to “long-termism” is the fact that so-called value shares are no longer cheap anyway. Normally, you’d expect to pay a premium for fast-growing companies, but in the past few years investors have spurned them in favour of those with low price-to-book values and nice yields.
The result: the premium has all but disappeared. Today, value shares and growth shares cost much the same in p/e terms, something that suggests you are getting the growth element in the latter for “free”.
In relative terms, perhaps, says Simon Nixon on Breakingviews.com, but that doesn’t mean you should be rushing in. Note that the mergers and acquisitions boom has inflated prices across the board to the extent that the median p/e ratio in the UK market is now 17.6 times, compared to a long-term average of 15.4 times. That’s not compelling, particularly given the fact that we know a great deal of cash has been squandered in the dividend boom.
The same is true of small-cap ‘value’ shares, says Phillip Coggan in the FT. Their prices have been bid up over the last few years, yet they are very exposed to the domestic economy, and now that growth is slowing – and may well keep doing so – they really don’t offer much value at all.
Investors keen to be in the UK market would be better off moving up the market-capitalisation scale and buying into larger growth shares. Only these can realistically promise investors higher returns in the future, and as such they should have a higher rating.
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Annunziata Rees-Mogg
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