Investing for growth

The notion that economic growth is good and lack of growth is bad is one of the few things politicians seem to agree on. But as far as investors are concerned, the emphasis on growth can be misleading.

For example, China remains the strongest ‘growth story’ among major economies, with gross domestic product (GDP) growth in 2011 estimated by the World Bank at 9.1%. Yet over this period the Chinese stock market was down 16%. In contrast, the US, with average GDP growth over the same period of 1.7%, saw its stock market rise by 8%.

So the reality is that national GDP figures tell you very little about the opportunities and prospects for business. Given that economic forecasting is notoriously unreliable, investment managers prefer to focus on business conditions in general and the specific experience of individual companies.
That has led some managers to launch investment funds focusing on what they see as growth areas regardless of the GDP numbers. Examples include:

• Natural resources: increasing demand from emerging markets is likely to mean steady growth in revenues and profits for mining and energy companies.
• Infrastructure: the huge need for new facilities in the emerging markets, and renewal of those in the developed world means project managers, planners, builders and engineers can all expect increasing orders.
• Agriculture and timber: rising population numbers are driving a need to improve production and productivity.
• Healthcare: fast-increasing basic needs in emerging markets, plus ageing populations in developed nations, mean big growth in demand for medicines and medical services.

There’s always value

Meanwhile, another group of investment managers continues to emphasise ‘value’. Rather than high growth, what they look for are companies with strong finances, steady businesses and good dividend payments to shareholders. Most such companies are well-established and big – they include oil, pharmaceuticals, supermarkets and utilities.

‘Equity income’ funds often invest primarily in businesses like these, which may not be entirely recession-proof, but are strong enough to survive and to gain market share from businesses that don’t endure. In investment terms there are always some good opportunities available, regardless of the general economic climate.

Past performance is not a guide to future performance. The value of your investments can go down as well as up, and you may not get back the original amount invested.