Beware the fad for growth

In the long-term a focus on quality makes sense
Thursday 01 Dec 2016 Author: Tom Sieber

Investment bank Morgan Stanley sees European earnings per share (EPS) growing for the first time in five years in 2017 and forecasts a 12% increase.

It is even more positive on the UK with 18% EPS growth estimate, thanks to the London market’s higher commodity weighting and the currency tailwind provided by sterling weakness.

Cyclical boost

This chimes with our main feature Growth Vs Quality in last week’s issue (Shares, 24 Nov). There is no question certain quality and defensive stocks look expensive but investors should think carefully before blindly piling their cash into cyclical names and commodities stocks in 2017.

You first need to consider your investment timeframe and appetite for risk. Many of the stocks which could do well in a higher growth environment are ones to ‘rent’ rather than own for the long-term. You would need to actively manage these positions.

MORGAN STANLEY 12 MONTH FTSE 100

TARGET:  7450

Out of fashion

For many of us I suspect, focusing on quality would be a better approach for the long term. Not all cyclicals are bad companies but equally not all quality names are necessarily overvalued.

Energy consultant RPS (RPS), for example, has a very consistent track record and has delivered dividend growth through several cycles. It has taken a hit from the downturn in the oil and gas sector but this looks to be reflected in the fairly low share price compared to times when commodities were more in favour.

Even traditionally defensive names such as pharmaceutical GlaxoSmithKline (GSK) and tobacco stock Imperial Brands (IMB) are on price to earnings ratios of around 12. That’s incredibly cheap for those types of companies.

For those who would rather go down the collective route – investment trust Brunner (BUT) trades at a near 17% discount to its net asset value yet boasts 44 consecutive years of dividend growth.

Cash is king

A focus on quality may prove unfashionable in the coming 12 months but if your selections are generating plenty of cash to fund generous dividends then frankly, who cares?

These dividends can be reinvested, allowing you to truly tap the wealth generating potential of the stock market through compounded returns. (TS)

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