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Home / News Article / Growth stocks buck flight-to-quality trend

13 June 2013
Uncategorised

Equity investors sought high earnings growth in May to break their fixation with balance-sheet strength, says Lewis Grant, senior portfolio manager at Hermes Quantitative Equities.

Cyclical revival: Investors kicked their first-quarter habit of preferring stocks with solid finances and revenues to favour increasing expected earnings. Cyclicals gained the last month most as growth outperformed all other factor categories for the first time since October 2011.

Low quality: Cyclical-growth companies surged as quality-growth stocks lagged. The global aerospace and defence sector, traditionally a cyclical sector, gained 6.4% while quality-growth names in the household products sector fell by 1.6%. In the chart below, which shows the performance of the factor categories used by Hermes Quantitative Equities, the outperformance of growth in May is clear:

quintile

Figure 1. The difference between the performance of growth and the other factor categories, as measured by quintile spread, used by Hermes Quantitative Equities.

Unsentimental: Companies with strong balance sheets, increasing margins and who demonstrated shareholder-friendly behaviour, such as boosting dividends, were buoyed by price momentum in Q1. These quality characteristics went unrewarded across all markets last month. Profitability factors were especially neglected in Japan and Europe.

Running with risk: Do investors anticipate a global economic and stock-market recovery? Or are they seeking value in cyclical stocks now that quality companies are more expensive? Whatever their motivations, they prized forward-earnings growth in May. But the correction in Japan and slide in Europe in early June suggest that investors have restrained this bullishness. “Sell in May and go away” may ring true in 2013.

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