AB Asset Management: "Bet on US Quality Growth Stocks Over Cyclical Stocks"

First Half US Growth Stocks Yield 9%
"Growth Stocks Can Outperform Macroeconomic Recovery"
If Growth Stocks Are Pricey, Consider Investing in 'Defensive Stocks'

[Asia Economy Reporter Minji Lee] “In a situation where concerns about a second wave of COVID-19 are high, betting on cyclical stocks is very worrisome. Despite the controversy over the overvaluation of companies with outstanding profit growth rates in the stock market, it is better to invest in high-quality U.S. growth stocks.”

David Wong, Senior Investment Strategist of the Equity Division at AB Asset Management, stated this regarding the stock market outlook during the ‘2020 Global Stock and Bond Market Outlook Press Conference’ held via webinar on the morning of the 22nd.

Senior Wong explained, “Stock prices reflect the market’s interest in future profits, and companies with excellent profit growth rates and profit visibility tend to receive high valuations,” adding, “The market tends to undervalue companies that continue to grow and generate excess returns compared to the MSCI Global Index.”

He emphasized balanced investment and said that in stock investing, it is better to invest in growth stocks with low sensitivity to economic cycles and strong performance. He recommended U.S. stocks as the top choice, reasoning that interest rates are low at around 0%, and investment returns are better than those of emerging markets and European stocks. He also added that it is better to invest in high-quality growth stocks with strong long-term performance, focusing on the healthcare sector rather than the technology sector.

Senior Wong identified the risk factors in stock investing as △ the resurgence of COVID-19 △ trade friction between the U.S. and China △ stock market valuation. He emphasized, “In a situation where it is unknown when COVID-19 will disappear, betting on stocks sensitive to economic activities is risky,” and added, “It is possible to build a portfolio that can withstand macroeconomic recovery by including stocks that are not sensitive to the economy.”

In the first half of the year, U.S. growth stocks recorded superior performance compared to other stocks and credit. As of the 30th of last month, U.S. growth stocks posted a 9.8% return, while U.S. stocks (-3.1%), global high-yield bonds (-4.7%), the Hang Seng Index (-11.9%), and CCC-rated high-yield bonds (-20.1%) suffered losses.

Comparing the 5-year returns of high-yield corporate bonds and growth stocks, growth stocks performed better. Senior Wong explained, “The annualized 5-year performance of the top 10 stocks included in the Russell 1000 Index is 13.6%, whereas the Markit iBoxx USD Liquid High Yield Index for high-yield corporate bonds was only 3.8%.”

Regarding opinions that U.S. stocks are overvalued due to the large gap between the real economy and the stock market, he diagnosed it as an optical illusion caused by the relatively low proportion of cyclical stocks in the U.S. stock market. Looking at the U.S. S&P 500 Index, the ratio of cyclical to non-cyclical stocks is about 3 to 7. Considering that the MSCI EM (Emerging Markets Index) ratio is 5 to 5, there are many non-cyclical stocks.

Senior Wong predicted that growth stocks related to electric vehicles, digital health data, internet traffic, and DNA analysis will continue to grow even during economic downturns. However, he advised that investors who are afraid of investing in growth stocks might consider investing in defensive stocks. Senior Wong said, “For investors who do not want to take risks, buying stocks with lower volatility such as healthcare, utilities, and consumer staples, which have risen less compared to other stocks, is also positive.”

This content was produced with the assistance of AI translation services.