Download Growth Stocks: New Opportunities in a Trump Economy?

MARKETVIEW
GrowthStocks:NewOpportunitiesinaTrumpEconomy?
February20,2017
2278Views
Theprospectofearningsaccelerationincyclicalsectorsoffersactivemanagers
thechancetouncovercompellinggrowthopportunitiesinpreviouslyoverlooked
areasofthemarket.
Af teradvancingalongsideamarket-widerecoveryf romtheglobalf inancialcrisisof 2008–09,
manyeconomicallysensitiveareasof theU.S.equitymarketspentmuchof thesubsequentsix
yearsinthedoldrums.Low,andinsomecasesnegative,interestratesandanemiceconomic
growtharoundtheglobecombinedtokeepcertain“cyclical”sectorsof themarketincheck.
Inparticular,f irmsinthef inancialssector(especiallybanks)struggledwithalowinterest-rate
environmentthatkepttheirnet-interestmargins(thespreadsbetweentheirlendingincomeand
expenses,andthesourceof muchof theirprof itability)atrazor-thinlevels.Companiesinthe
industrialsandmaterialssectorssawtheirrevenuesmoderate,asweakglobalgrowthweighedon
demandf ortheirproductsandservices.AsshowninTable1,thesethreesectorslaggedthe
broadermarket,tovaryingdegrees,f romthestartof 2011throughthemidpointof 2016,duringa
timewhentheef f ectof ultra-accommodativecentralbankpoliciesonbroadswathsof theglobal
economycouldbecharacterizedasaf ormof f inancialrepression.*
Table1.CyclicalSectorsLaggedtheMarketfromtheStartof2011throughMid-2016
AnnualizedreturnfortheS&P500®Indexandindicatedsectors
Source:Bloomberg.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any
specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture
results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect
investment.Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithout
notice.Projectionsshouldnotbeconsideredaguarantee.
Pastperformanceisnoguaranteeoffutureresults.
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However,inthesecondhalf of 2016,themacrobackdropf orthesecyclicalsectorsbegantoturn
f orthebetter,heraldinganexpansionaryeconomicenvironment.Thisshif tbeganwitha
surprisinglystrongshowingf orthird-quarterU.S.grossdomesticproduct(GDP),withthe
preliminaryestimate,announcedinOctober,of anannualgrowthrateof 3.2%,subsequently
revisedevenhigher,to3.5%,inDecember.Thisshif tininvestorsentimentcontinuedwiththeU.S.
FederalReserve’s(Fed)announcementof aninterest-ratehikeinDecember2016(thef irstsuch
moveinnearlyayear)andtheFed’sf orecastof threeadditionalhikesin2017.
Whatreallyseemedtodrivetheshif tinsentiment,though,wastheelectionof DonaldTrumpas
U.S.presidentonNovember7.Trump’svictoryseemedtoauguraneraof f iscalstimulusand
corporatetaxref orm,withthepotentialtof urtherboostthedomesticeconomy.AsChart1
illustrates,indicationsof f asterpaceof economicgrowthbodeparticularlywellf orthethree
af orementionedcyclicalsectors,whichstandtoexperiencethegreatestchangeintheirrateof
earningsgrowthoverthenexttwoyears(excludingenergy),basedonanalystf orecastscompiled
byFactSet.
Chart1.AnalystsRecentlyForecastedStrongEarningsGrowthforCyclicalU.S.Equity
Sectors
ExpectedchangeinearningsgrowthratebyS&P500sector(excludingenergy)forindicated
periods,asofFebruary10,2017
Source:FactSet.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any
specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture
results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect
investment.Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithout
notice.Projectionsshouldnotbeconsideredaguarantee.
Pastperformanceisnoguaranteeoffutureresults.
Whileinvestorsmaybeconcernedthattheseearningsgrowthprojectionsarelargelyattributable
toPresidentTrump’santicipatedf iscalagenda,thisisnotthecase(asweoutlinedintheJanuary
23,2017,MarketView).Mostsectors,inf act,haveseentheirf orecastedearningsgrowth
modestlydecreasesincetheelection.Instead,ongoingf undamentaldevelopments,includingthe
potentialf orseveralmoreinterest-ratehikesf romtheFedandarevivalineconomicgrowthnot
justintheUnitedStatesbutacrossthedevelopedworld(seeTable2),havehelpedunderpinthe
recentrallyinthesecyclicalstocksaswellastheexpectationf orcontinuedearningsgrowth
acceleration.
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Table2.StrengtheningU.S.andGlobalEconomicGrowthCouldSupportCyclical
Sectors
Real(inflation-adjusted)grossdomesticproduct(GDP)forecastsfor2016–18,asofDecember
31,2016
Source:Organizationf orEconomicCo-operationandDevelopment(OECD).Thehistoricaldataaref orillustrative
purposesonly,donotrepresenttheperf ormanceof anyspecif icportf oliomanagedbyLordAbbettoranyparticular
investment,andarenotintendedtopredictordepictf utureresults.Forecastsandprojectionsarebasedoncurrent
marketconditionsandaresubjecttochangewithoutnotice.Projectionsshouldnotbeconsideredaguarantee.
Pastperformanceisnoguaranteeoffutureresults.
Forgrowthinvestors,thechancef orastrongpick-upintherateof earningsgrowthinthese
cyclicalsectorsholdsthepotentialf orsignif icantopportunity,andalsohighlightstheimportanceof
activemanagementinminingthisparticularvein.Thepastsixyearsof f inancialrepressionhave
ledtoadistortioninequitymarkets,withmanyhigh-yielding,slow-growthstocksreceivingrich
valuationsf rominvestorsamidayield-starvedandlow-growthworld.Thistrendhasledthe
predominantbenchmarkf orthisstyle,theRussell1000® GrowthIndex,tobecomepopulatedwitha
numberof theseslow-growth,dividend-orientedstocksduetoanindex-constructionmethodology
thatplacesanemphasisoncompanieswithhighprice-to-bookvalueratios.Onthef lipside,the
stagnationof economicallysensitiveareasof themarketduringthisperiodhasledmanycyclical
stockstobecomeunderrepresentedinthegrowthindexrelativetotheirhistoricalexposure.(See
Chart2.)
Chart2.Slower-GrowingSectorsHaveGainedGreaterWeightinaKeyGrowth
Benchmark
Sectorweightings(excludingenergy)intheRussell1000®GrowthIndex,2011–16
SourceWilshireAtlas.Thehistoricaldataaref orillustrativepurposesonly,donotrepresenttheperf ormanceof any
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specif icportf oliomanagedbyLordAbbettoranyparticularinvestment,andarenotintendedtopredictordepictf uture
results.Indexesareunmanaged,donotref lectthedeductionof f eesorexpenses,andarenotavailablef ordirect
investment.Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithout
notice.Projectionsshouldnotbeconsideredaguarantee.
Pastperformanceisnoguaranteeoffutureresults.
Thisskewingof thebenchmarkindexprovidesactivemanagersacompellingopportunityto
augmenttheirgrowthportf olioswithmeasuredexposuretothesecyclicalsectorsthatare
experiencingthegreatestrateof earnings-growthacceleration.Bydoingso,thesemanagerscan
providetheirinvestorswithanothersourceof growththatmaynotberecognizedorf ully
appreciatedbymanagerswhof ocusonmorecommonlyf ollowedgrowthareas.Bytakingamore
holistic,broad-basedviewof themarket—especiallywhenthewindsof economicchangebeginto
increase—activemanagersshouldbeabletoidentif yopportunitiesinareasof themarketignored
bytheircounterpartswhoholdaf arnarrowerviewof growthstocks.
*CarmenN.ReinhartandM.BelenSbrancia,intheirMarch2011paper,“TheLiquidationof GovernmentDebt,”note
thattheterm“f inancialrepression”includesdirectedlendingtogovernmentbycaptivedomesticaudiences(suchas
pensionf unds),explicitorimplicitcapsoninterestrates,regulationof cross-bordercapitalmovements,and
(generally)atighterconnectionbetweengovernmentandbanks.
ANoteaboutRisk:Thevalueof investmentsinequitysecuritieswillf luctuateinresponsetogeneraleconomic
conditionsandtochangesintheprospectsof particularcompaniesand/orsectorsintheeconomy.Historically
speaking,growthandvalueinvestmentstendtoreactdif f erentlyduringtheeconomiccycle.Sincevaluestocksare
of tencyclicalinnature,theymaybenef itf romtheincreasedspendingthatusuallyoccursduringaneconomic
expansion.Growthstocksmayalsoperf ormwellduringanexpansion,buttheymayalsobeoutof f avorduringmarket
downturns,wheninvestorspaymoreattentiontopriceratios.Whilegrowthstocksaresubjecttothedailyupsand
downsof thestockmarket,theirlong-termpotentialaswellastheirvolatilitycanbesubstantial.Noinvestingstrategy
canovercomeallmarketvolatilityorguaranteef utureresults.
Forecastsandprojectionsarebasedoncurrentmarketconditionsandaresubjecttochangewithoutnotice.
Projectionsshouldnotbeconsideredaguarantee.
Thisarticlemaycontainassumptionsthatare“f orward-lookingstatements,”whicharebasedoncertainassumptions
of f utureevents.Actualeventsaredif f iculttopredictandmaydif f erf romthoseassumed.Therecanbenoassurance
thatf orward-lookingstatementswillmaterializeorthatactualreturnsorresultswillnotbemateriallydif f erentf rom
thosedescribedhere.
Statementsconcerningf inancialmarkettrendsarebasedoncurrentmarketconditions,whichwillf luctuate.Thereis
noguaranteethatmarketswillperf orminasimilarmannerundersimilarconditionsinthef uture.
Grossdomesticproduct(GDP):Themonetaryvalueof allthef inishedgoodsandservicesproducedwithina
country'sbordersinaspecif ictimeperiod,thoughGDPisusuallycalculatedonanannualbasis.Itincludesallof
privateandpublicconsumption,governmentoutlays,investmentsandexportslessimportsthatoccurwithinadef ined
territory.
Theprice-to-bookratioisusedtocompareastock'smarketvaluetoitsbookvalue.Itiscalculatedbydividingthe
currentclosingpriceof thestockbythelatestquarter'sbookvaluepershare.
®
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TheRussell1000Index® measurestheperf ormanceof the1,000largestcompaniesintheRussell3000Index,which
representsapproximately92%of thetotalmarketcapitalizationof theRussell3000Index.TheRussell1000 ®
GrowthIndexmeasurestheperf ormanceof thoseRussell1000companieswithhigherprice-to-bookratiosandhigher
f orecastedgrowthvalues.
TheS&P500 ® Indexiswidelyregardedasthestandardf ormeasuringlargecapU.S.stockmarketperf ormanceand
includesarepresentativesampleof leadingcompaniesinleadingindustries.
Indexesareunmanaged,donotref lectdeductionof f eesandexpensesandarenotavailablef ordirectinvestment.
TheopinionsinMarketViewareasofthedateofpublication,aresubjecttochangebasedonsubsequentdevelopments,and
maynotreflecttheviewsofthefirmasawhole.Thematerialisnotintendedtoberelieduponasaforecast,research,or
investmentadvice,isnotarecommendationoroffertobuyorsellanysecuritiesortoadoptanyinvestmentstrategy,andis
notintendedtopredictordepicttheperformanceofanyinvestment.Readersshouldnotassumethatinvestmentsin
companies,securities,sectors,and/ormarketsdescribedwereorwillbeprofitable.Investinginvolvesrisk,including
possiblelossofprincipal.ThisdocumentispreparedbasedontheinformationLordAbbettdeemsreliable;however,Lord
Abbettdoesnotwarranttheaccuracyandcompletenessoftheinformation.Investorsshouldconsultwithafinancialadvisor
priortomakinganinvestmentdecision.
Investorsshouldcarefullyconsidertheinvestmentobjectives,risks,chargesandexpensesof
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