Are growth stocks taking a defensive turn?

Analysis reveals factors synonymous with growth have entered a rare phase

Are growth stocks taking a defensive turn?

Growth stocks have been on a tear in the U.S. equity market in recent months, a phenomenon that at least one expert has argued is due to high demand among investors and cheaper money from central banks’ quantitative easing. But there’s another feature of growth’s recent performance that should be of note.

In a new blog post, Stephen Duench, vice president and portfolio manager at AGF Investments, noted how the S&P 500 Growth Index outgained the S&P 500 Index by almost 10% in June. That run reportedly represented its best month of outperformance versus the broader market in 14 years, based on AGFiQ data.

“But what is perhaps just as remarkable—and yet less recognized —is the fact that growth can now be characterized by its defensive attributes as much as anything else,” Duench said.

Citing an analysis by his firm, he said several factors synonymous with growth stocks have recently shown market betas that significantly deviate from their historical tendency to hover around 1 on average. Drawing from their own data along with data from FactSet, they determined that momentum and forward earnings growth currently exhibit rolling three-month betas of 0.65 and 0.69, respectively; in early June, they showed similarly low scores of 0.59 and 0.5.

“In other words, both factors have become far less volatile in relation to the overall market than would normally be the case,” Duench said, noting that betas far below 1 are rare for growth-like characteristics.

Other factors are also showing atypical behaviour, he added. The current betas for other factors like value and dividend income, he said, have shown dramatic and uncharacteristic increases to well above 1 in recent weeks.

Citing another analysis of AGFiQ and FactSet data, he said the beta spread between forward earnings growth and deep value has reached its most extreme levels in more than two decades, with the last time it came close to being that divergent being the early part of 2009, defined by the value-fuelled ignition of the long bull market following the Great Financial Crisis.

“[T]hat doesn’t mean growth’s reign as an outperforming, defensive juggernaut can’t continue,” Duench said, “but like most other market deviations of this magnitude that have come before it, there’s a high probability that it will end sometime soon rather than later.”


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