asset allocation | august 4, 2020
Why Our Asset Allocation Committee Likes Both Growth and Value
Our Asset Allocation Committee is fairly diversified between value and growth stocks. Japanification and disruption favor growth, while cheap valuations and transformation favor value.
Head of Global Multi-Asset
Growth stocks could benefit from Japanification—being in a lower interest rate, lower growth environment for a long period—and disruption by innovative companies.
Cheap valuations, should economic growth stabilize, as well as the potential for transformation as companies adapt their business models, favor value stocks.
In this market environment, we hold a fairly diversified position between value and growth stocks. To explain this diversified position, let me give my top two reasons to like growth stocks and then my top two reasons to like value stocks.
In favor of growth stocks: Japanification and disruption. In favor of value stocks: valuation and transformation.
So, for growth stocks, Japanification—being in a lower rate, lower growth environment for longer—is favorable. Those are companies that can do well even when we don’t see a cyclical upswing in the economy. On disruption, in growth stocks we find a lot more disruptors—those that dominate the digitization of the economy—than disrupted companies, which are mainly in the value stocks asset class.
In favor of value, well valuations are clearly favorable for value stocks. On transformation, companies will adapt over time and this will be the case for value stocks. Financial companies, banks for example, will diversify their revenues to be less dependent on interest rates, so think wealth management or trading. Energy companies will continue to improve capital discipline, as well as diversify towards renewables. So the idea of transformation over time could favor value stocks because they are cheap to begin with.
So from a tactical asset allocation perspective, at the moment we are not taking a large position between value or growth stocks.
This material is provided for informational purposes only and not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of August 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Actual outcomes and occurrences may differ materially from any forward-looking statements made.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income-oriented stocks. The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced. All charts and tables are shown for illustrative purposes only.
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