Praveen Jagwani, chief executive of UTI International, said the simplest case of demand-led growth is “more people with more money buying more stuff”.
“Typically, when more people enter the middle-class, it is axiomatic that their incomes have risen. With the additional money, middle-class buys its way to a higher standard of living – refrigerators, washing machines, cars, homes, healthcare, holidays etc,” he said.
Jagwani characterised this as ‘good growth’, meaning the goldilocks scenario where unemployment and inflation are “just right”, as it prevents wealth inequality and requires a “judicious mix of supply-side and demand-side policies”.
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Many of the world’s major economies and markets have been impacted by its shrinking middle class, Jagwani said, namely Europe, US, Japan and especially China, which he said was a “classic case of ‘bad growth'”.
“Its plan to throw 4 trillion yuan (£450bn), or about 13% of China’s GDP in 2008, at everything from railroads to airports has resulted in a perilous debt overhang. China’s debt-to-GDP ratio has mushroomed to a whopping 280% and its biggest real estate companies have defaulted,” he said.
“The outlook for China is dire as pandemic-scarred consumers and businesses hesitate to spend. Their only quick-fix solution is yet more stimulus.”
This subdued economic outlook has matched a slowdown in China’s equity markets this year.
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On a sector basis, the IA China/Greater China was down almost 16% year-to-date, whereas the IA India/Indian Subcontinent has had a strong bout of returns, making 8.8% for the period, according to data from FE fundinfo.
Jagwani said India was “enjoying consistent consumption-led growth driven by a growing middle-class”, along with Indonesia and Vietnam.
The International Monetary Fund has pipped India to be the fastest growing economy in the current decade, he added, creating an investment opportunity in the region, as it houses “a large concentration of compounding companies, given the natural drivers of good growth”.
“The predictability of such internal growth makes these countries ideal from an investment perspective,” he said.
Matthias Born, head of equities at Berenberg, pushed back on Jagwani’s conclusion that Europe was not a place investors could find growth opportunities, even if that had been the case previously.
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“Looking at the past fifteen years, the headline return numbers are not particularly awe inspiring. Most global markets and the most considered global benchmarks outperformed the European market significantly,” Born said.
Year-to-date, the IA Europe Excluding UK sector has returned just 1.6% on average. However, he argued that subsectors of the market had performed well compared to its global peers.
According to Born, Europe is haven for companies within recently popular growth equity themes such as AI, as many of the “most critical aspects of the industry’s value chain are housed in Europe”.
“Staying true to Europe’s long tradition around equipment manufacturing excellence, it is semiconductor equipment from Holland and Germany which has emerged as the lynchpins of the entire industry,” he said.
“A significant share of that was, of course, driven by the Dutch giant ASML, however as we can see, there are other smaller companies that also benefit from strong structural growth.”
Growth as an investment style
Looking to growth as a portfolio bias, the style has been extremely challenged this year with persistently higher interest rates, according to Rob Morgan, chief investment analyst at Charles Stanley.
Growth style stocks generated major returns in the post-2008 equity bull run, bolstered by the years of ultra-low rates and inflation allowing them to channel its liquidity into growing the company.
But as macroeconomic headwinds have changed, the momentum in this part of the market has stalled as its potential future returns, or the ‘growth’ it would have seen, have lessened materially.
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Over ten years, the returns on growth bias stocks have outpaced value names, with the MSCI ACWI Growth index making 211.5% total returns during that time, and the MSCI ACWI Value generating a 105% total return, according to FE fundinfo.
In the last three years, however, value has outperformed growth, gaining 40.3% versus 20.4% from growth.
Mark Wright, portfolio manager at MGIM, said 2023 had been a “frustrating year” for investors, with equities and bonds yet again “struggling to gain traction”, following a “disappointing” 2022. Meanwhile, the companies which have posted resilient earnings have not been rewarded by investors.
“The market has adopted an attitude of ‘things might be ok now, but what about in six months’ time’,” Wright said.
Morgan said that in the current environment investors should “prioritise quality and resilience” and seek out the managers which are aligned with “important structural trends that stand to benefit equity investors”.
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While investors were “spoilt for choice” for a quality growth approach, Morgan said the Rathbone Global Opportunities and BlackRock Global Unconstrained Equity funds were the “standouts”.
Morgan described the Rathbones as “very well established”. Over the last two decades, the fund has been managed by James Thomson.
On the other hand, he said the BlackRock fund is “relatively new entrant from an old hand” but offers an “excellent” global growth option” if investors could handle the concentrated, or what he described as “punchier”, portfolio.
