Are we seeing the switch away from ‘growth’ investing towards craving value?

The economic recovery is giving a massive boost to corporate earnings the world over. That is certain. But what is less clear is whether the main beneficiaries will be the tech giants whose shares have raced ahead over recent years, or whether their less glamorous counterparts in finance, energy and other “old” industries will become the long-term winners.

Put another way, is the fashion for “growth” investing switching to “value” investing?

This week will give us some clues as a clutch of enterprises from both camps are reporting their results. In the high-tech corner Elon Musk has just revealed record production and profits for Tesla albeit with a bit of help from profits on bitcoin.

There are not any comparable really big tech enterprises on this side of the Atlantic, so the UK and European markets represent the value camp. Here we have already had strong profits from HSBC, Europe’s largest banking group, which have shot up by nearly 80 per cent as it has cut its prospective loan losses, and from BP, which has benefited from the recovery in oil prices. The earnings of the big US banks have also been very strong this quarter, and then markets expect good results from ExxonMobile, America’s largest oil company, when it reports on Friday.

So what are the clues? One thing is really clear and that is that the old giants in the unfashionable sectors are doing really well. The global recovery is secure, and the pandemic has enabled them to cut their cost base. HSBC is going to shed about 20 per cent of its office space worldwide and more in London – including scrapping its executive floor at the top of its tower headquarters in Canary Wharf. BP has cut its labour force by 10,000 over the past year. That pattern is pretty much universal, and the result will be that rebound in demand brings a rebound in profitability.

On the tech side the impact of the pandemic has been more to increase demand than give an opportunity to cut costs. Yes, that will be very good for profits, but investors have known that for months and that has been reflected in the share prices. Over the past year the Dow Jones index, which represents the old, solid US companies, is up 41 per cent. However the Nasdaq index, which focuses on US tech enterprises, is up 62 per cent. (By comparison the FTSE100 index, the 100 largest UK companies, is up only 19 per cent – UK shares are still out of fashion for global investors.)

Until a couple of months ago the big bet on tech versus solid was secure: tech won hands down. But that meant that tech companies became very expensive, maybe too expensive. In recent weeks there have been wobbles in their share prices. For example, Tesla shares in January peaked at more than $880. Now, despite those good production figures they are down to around $720. By contrast, HSBC share ended last year at £379. Now they are £438.

So the question for investors is this. Are we seeing “the great rotation” – the rotation, that is, of money out of tech and fashionable and into solid and boring? It has been long predicted that this would happen, but the wave of enthusiasm for technology just went on and on. The momentum behind technology was just too strong. The past couple of months have seen signs of the rotation and the question is whether it will continue.

One of the most cogent advocates of this is John Surplice, who is head of European equities at Invesco, the UK-based investment manager. He thinks that investors will increasingly recognise that European shares offer better value. As the vaccines are rolled out, there will be a synchronised global recovery and when that happens the fact that European shares are undervalued vis-à-vis US ones will mean they deliver better returns.

This has become a common view. For example JP Morgan Asset Management has been writing that “the stars are aligned for UK equities”, its argument being that UK shares are historically cheap and are a way of avoiding the sky-high valuations of US technology companies.

Who knows which view will be right? The point of any market is that there are always two opposing viewpoints. If US tech profits hold up, then maybe the rotation won’t continue. If on the other hand the run of strong earnings from their less glamorous cousins continues, then maybe it will. What is beyond dispute is that this debate about the rotation is one of the hottest subjects in investment right now, and the outcome matters enormously for all investors.