A lack of options since the global financial crisis has led to growth shares in Australia being three times the price of companies across the global benchmark known as the MSCI world, new research has found.
According to State Street Global Advisors, growth shares in Australia are expected to rise by 38 per cent, while global high-growth companies are predicted to rise by 31 per cent. This means investors in Australia are paying three times the price for just 7 per cent stronger growth.
State Street’s head of portfolio management, Bruce Apted, has found it hard to justify the high cost of Australian growth shares.
“While the higher growth is a consideration, it isn’t enough to justify the valuation differential,” Mr Apted said.
The outperformance of growth
The outperformance of growth in the last decade has been one of the more curious anomalies observed in financial markets for some time, State Street said.
“Part of the explanation lies in the low-growth world we have been in since the global financial crisis. A lack of growth opportunities (limited supply) makes the few companies with growth more attractive to investors,” Mr Apted said.
According to State Street, the lowering of monetary policy is also having an impact on the wealth effect, especially on those with exposures to property and equities, which has been seen to encourage further risk within the growth sector of the market.
Growth v bonds
Global equity markets were up in September following a tough August.
While “growth” and “momentum” have been the standout strategies in the last few years, in September, State Street did note a sharp reversal to this trend.
Investors in companies with higher growth underperformed against the broader market by almost 2 per cent, while investors in US 10-year government bonds gained returns of just under 2 per cent.
The bottom line
Growth in itself is a good thing with everything being equal, according to the fund management company, and it makes sense that investors should prefer to find companies with strong growth profiles.
In Australia, however, growth companies become inherently riskier when they become excessively expensive.
State Street has advised investors to maintain a balanced approach to their portfolios that focuses on those companies that offer the best combination of quality, value and improving outlook for the acceptable level of expected volatility which also provide opportunities for returns.
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