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The gloss comes off growth: are heady earnings multiples cause for concern?

“It is still too early to tell whether we’re at the start of long-term rally in value shares. The two day fall in US tech stocks (and a similar decline in Europe) is encouraging, especially after the value rally in Q4 last year. Tech shares have still held up well, but there are signs that positions are being reconsidered following the rise in bond yields, as previously low yields were given as a reason for their outperformance. It would appear that the value rally has further to go.

“The recent sell off in bonds shows inflation is now back on investors’ agenda. Rising hard and soft commodity prices come at a time when consumer demand is set to accelerate after months of lock-down. The expected improvement in economic activity has seen a resurgence in the relative performance of more cyclical businesses and financial companies. Many of these shares still look attractive and will benefit from operational gearing as demand picks up. Similarly, banks are again paying dividends and are often trading at substantially less than book values. Overall, there is much further to run on valuation grounds.

“Many growth shares have benefited from their relative attractiveness when growth was scarce and are now valued on heady earnings multiples. The gloss has come off in recent days and looking at longer term charts, they are still a long way from fair value and potentially have much further to fall. Growth is good, but not at any price!”

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