Identifying strategies and trends with long-term growth potential
April 23, 2020
Long-term growth potential
Value stocks have been out of favour, which we believe creates a potential opportunity for attractive returns over the next full market cycle.
Reinvested dividends can be an important component of a portfolio’s growth sleeve, especially those companies with growing and sustainable dividends.
An equal-weighted version of the S&P 500 gives the same allocation to each of the 500 stocks in the index, increasing the allocation to smaller companies, which may have greater growth potential than larger companies.
Equities can be the growth engine of a portfolio. But this engine doesn’t always fire on all cylinders. Market leadership is constantly shifting from one sector to another. Today’s winners could be at the bottom of next quarter’s list. This roller coaster may be exciting for short-term traders, but it can make long-term investors queasy.
Here’s the dilemma in a nutshell: There are more than 50,000 publicly traded companies on the world’s stock exchanges1 – how can investors target the ones with the greatest potential for long-term growth?
At Invesco, we believe there are four compelling paths for investors to explore:
1. Value stocks
Value stocks trade at a discount to their long-term value. They are often more mature companies with a focus on shareholder returns. Growth stocks have above average growth in earnings and sales. They tend to focus on getting bigger and reinvesting in their business.
Value stocks have delivered higher returns with less risk than growth stocks over the past 40 years. In recent years, however, value stocks have been out of favour,2 which we believe creates a potential opportunity for attractive returns over the next full market cycle.
2. Dividend-paying stocks
Dividend-paying stocks are a popular choice among income-seeking investors. But we believe that reinvested dividends can be an important component of a portfolio’s growth sleeve as well – especially those companies with growing and sustainable dividends.
Historically, dividend-paying stocks as a whole have outperformed non-dividend-paying stocks, with those that have grown and initiated dividends leading the way.
3. Global growth themes
Finding companies with the potential for long-term growth requires a deep understanding of the trends that are powering their business. There are three trends that we believe can help drive long-term growth.
• Increased wealth: The global middle class has expanded rapidly over the past generation, and new members have money to spend.3
• Aging population: Between 2017 and 2050, the number of people over 60 is expected to double, and their spending habits can be expected to change.4
• Technological change: The pace of innovation is disrupting every type of industry and changing our daily routines.
4. Smaller companies
The S&P 500 Index contains 500 stocks. That sounds like a well-diversified collection of companies, until you peek under the surface. The S&P 500 is a market-cap-weighted index, which means that the biggest companies have an outsized impact on results.
In contrast, an equal-weighted version of the S&P 500 gives the same allocation to each of the 500 stocks in the index. Relying solely on the market-cap-weighted benchmark minimizes the growth opportunities within the smaller end of the S&P 500 – and excludes the mid-cap and small-cap stocks that aren’t in this index at all.
Invesco solutions to target growth opportunities
At Invesco, we have an array of strategies that align with these four paths.
2As at March 31, 2019, five-year annualized returns for the Russell 1000 Growth Index were 13.50%, compared to 7.72% for the Russell 1000 Value Index.
3Source: “The Unprecedented Expansion of the Global Middle Class,” Global Economy at Development
at the Brookings institute, February 2017. Most recent data available.
4Source: United Nations, “World Population Ageing: 2017.” Most recent data available.
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