How market volatility creates investment opportunities
Hugh Sergeant, manager of ES R&M UK Recovery, joins us this week to talk about all the...
Growth is one of the most commonly used terms in the investment industry, and it is used in a variety of contexts. For example, it could be used to indicate a style of investment – growth instead of value. Or it could be referring to the main aim of an investment: to grow rather than to produce an income.
Growth can also be used when people are referring to the health of an economy – when it is growing or contracting. While economic growth doesn’t always correlate directly with stock prices, it can boost confidence and increase spending, which in turn can bolster markets.
But there is more to economic growth than may at first meet the eye. Different types of economic growth have very different impacts on both specific sectors, and global equity markets as a whole.
Here, we explain three different types of economic growth and highlight the funds that focus on them.
Essentially, cyclical growth is related to where we are in the economic cycle. As an economy grows, wages, productivity and consumer spending all tend to rise, while the labour market tightens. The opposite occurs when the economy goes through a period of contraction, which can ultimately lead to recession.
Cyclical industries are sensitive to the business cycle, performing well as the economy grows but less so as it contracts. Good examples are the consumer discretionary and financials sectors. Consumer discretionary companies tend to do well as people are confident in their future and spending more. Financials do well because, as economies grow, interest rates usually rise to keep a lid on inflation. Higher interest rates mean mortgage and loan rates rise, which in turn boosts their profits.
There are a number of funds that embrace cyclical sectors, such as ES R&M UK Recovery and Schroder Global Recovery. Going into 2021, both funds had a high weighting towards the aforementioned consumer discretionary and financials companies, as well as energy, materials and industrials – all areas that should benefit from economies reopening and recovering after Covid-induced lockdowns.
Other funds – such as LF Gresham House UK Multi Cap Income, Liontrust UK Smaller Companies and Guinness Asian Equity Income actively avoid cyclical areas. Brendan Gulston, co-manager of LF Gresham House UK Multi Cap Income, explained why in this podcast:
Structural growth drivers are related to a shift in the inner workings of an economy itself – and sometimes this change can be dramatic. Changes in economic development, resource availability or political systems could all impact structural growth, but a great example is the smartphone. The move from just calling and texting on a mobile phone to being able to live much of our lives on our handsets was a swift one – and it brought about a whole host of changes for both consumers and businesses.
Another good example is the structural growth shift in China. Once heavily reliant on manufacturing exporting products overseas, China’s economy is becoming increasingly service-led.
Funds that actively target companies benefitting from structural growth include Invesco Global Focus, Liontrust Sustainable Future Managed, TB Amati UK Smaller Companies, and Threadneedle Global Extended Alpha.
Charlie Dutton, manager of Ninety One Asia Pacific Franchise, told us more about how wider Asia is no longer a play on global growth but has structural drivers of its own in this podcast:
Secular growth occurs when something fundamentally changes within a sector or industry, creating a wave of new demand. But an important feature of secular growth is that its impact on markets is slow and prolonged.
Examples include ageing populations, technology as a disrupter, and the increasing number of women entering the labour force.
There are occasionally booms and busts with secular growth, as people over-anticipate the pace of change (the Dot Com bubble in 1999 for instance) but, over the long term, secular drivers will irrevocably change society and therefore the investment landscape.
Secular growth drivers also tend to have a knock-on effect on structural growth dynamics.
For example, research from Pictet Asset Management* shows that, in the 19th century, it took 46 years for 25% of the US population to adopt electricity. In the 20th century, however, it took 25% (of a now much larger populus) just seven years to get access to the World Wide Web. And today, one smartphone has more processing power than the entire Apollo space programme…
Funds that look to invest in companies that are enabling secular growth trends include Jupiter European Smaller Companies, FSSA Japan Focus, Marlborough Multi-Cap Growth and GAM Star Disruptive Growth.
Of course, with so much growth on offer, there is no reason to limit. your investments to just one area.
Baillie Gifford Japanese Income Growth fund invests in companies that fall into one of four growth buckets, for example – secular growth, growth stalwarts, special situations and cyclical growth.
Another fund that targets different types of growth is M&G Global Dividend. This portfolio is made up of a mix of quality businesses with reliable and steady growth, cyclical companies and those that are experiencing structural growth driven by either a product or geography.
At the end of the day, there is more than one way to grow your investments…
*Source: Pictet Asset Management, Dissecting the Great Disruption, March 2018.