Growth shares, particularly in the US, have been falling so far this week on concerns that rising long-term interest rates will derail a historic surge in the share prices of fast-growing companies. This has implications for the UK market, particularly technology-related shares like Scottish Mortgage and other highly rated shares that trade on high P/E ratios.
Pressures on growth shares
The other problem facing such shares that have done well under lockdown is that now investors are probably increasingly looking to shares that will do well once lockdown lifts. With Boris Johnson laying out his roadmap and airlines consequently reporting a surge in bookings, the shares that have done well are possibly looking to some to be rather expensive.
If the conditions that have allowed the likes of Ocado to grow rapidly change, it may still be a good company, but will the shares seem overvalued? Will earnings rise as quickly as they did in 2020?
My personal opinion is that growth shares that can be bought at a reasonable multiple of earnings, perhaps with a P/E of, say, less than 25, could still do well over the long term. If they have a moat (that is, barriers to entry), then that’s an indicator they may still do well in years to come. As such, I’d be happy to add them to my investment portfolio.
But in the short term, I expect growth shares will continue to struggle if vaccinations continue to be rolled out successfully.
Time for value shares?
This raises the prospect that in the short term, could value shares provide larger returns? Shares in banks, oil majors, travel companies, retailers, office and retail landlords have become lowly rated – on the whole – because of the pandemic. For example, the P/E of Lloyds Banking Group is 11.
Yesterday British Land, Barclays, and International Consolidated Airlines Group were among the highest risers on the FTSE 100, which tells a story of what investors are thinking now. On the other side, Scottish Mortgage Investment Trust, Avast and Just Eat were the three biggest fallers from the same index.
It’s hard to know if this trend will continue beyond this week, though I suspect it might. That said, it’s an uncertain situation and I’m not planning to base my next investments based solely on what’s happening in the market right now.
For me, the objective is still to build a long-term portfolio. Therefore, some value shares — especially those that might continue to do well for many years into the future — as well as growth shares are likely to be added to my investment holdings.
Once again, the pandemic is throwing up opportunities for a long-term investor like me. I hope as we come out of lockdown that the economy will grow. I think that will provide a boost for the stock market and for share prices.
