Growth investing can be an exciting strategy to pursue and there is usually some form of theme that is capturing the market’s attention. Whether it’s the rapid growth of the “Asian Tigers” of Hong Kong, Singapore, South Korea and Taiwan in the early 1990s, the emergence of the internet at the end of the 20th century or the commodity super-cycle in the 2000s, there are often high profile themes that capture investors’ attention. The returns on offer can look enticing, particularly through the rear view mirror.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The role of US technology stocks
Over the last decade, the US technology sector has been synonymous with growth investing. Various acronyms have emerged, including the FAANGs, the MAMAAs and, more recently, the “Magnificent Seven” of Apple, Microsoft, Alphabet (formerly Google), Amazon, Nvidia, Meta and Tesla. Between them, they have contributed significantly to the returns delivered by the US stock market.1
There have been plenty of interesting growth opportunities elsewhere, but the size and presence of these US technology businesses have meant their recent share price strength has obscured almost everything else. Investors have chased the strong returns. However, what starts as a growth boom can ultimately become an asset price bubble if investors start to buy because they are nervous about missing out, rather than because the companies are performing well. Bubbles do not end well, particularly for those investors that are late to the party who tend to bear the worst of the losses.
Only time will tell if US technology stocks are currently in a bubble, but it is certainly the case that the sector’s popularity has increased valuation risk. The extent of US technology sector outperformance has long exceeded that of the peak of the dotcom bubble in March 20002. They have come to dominate US and global indices.2 Against this backdrop, it may make sense for growth investors to look elsewhere, towards parts of the market where valuations are more modest, but where growth prospects are still appealing.
Investment opportunities in Continental Europe
Europe offers a diverse and dynamic opportunity set. The continent has its own technology success stories, such as semiconductor businesses ASML and STMicroelectronics, but these don’t attract anywhere near as much attention or hype as those in the US. As a result, valuations can be more modest, which means the potential upside for investors is greater.
Meanwhile, Europe also offers attractive exposure to other growth industries such as healthcare and luxury goods. In these sectors, Europe is home to market-leading businesses such as Novo Nordisk, LVMH and Hermès.
These opportunities may be available at a more attractive price than their US counterparts. The price to earnings ratio (a measure of share price relative to a company’s revenues) for companies in the MSCI Europe index is 17.5x, far lower than for the US-heavy MSCI World index, where the ratio is 24.3x.3
BlackRock Greater Europe Investment Trust plc offers exposure to a range of high-quality European growth businesses. It also has the ability to invest in companies in emerging Europe, which represents another, often-overlooked, source of growth.
Frontier markets
“Frontier markets” may be the next generation of economic success stories. Frontier markets are smaller, developing countries and include countries such as Morocco, Croatia or Bangladesh4. The frontier markets of Asia, Africa, Latin America and Eastern Europe offer an abundance of rapid growth opportunities. Risks may be higher in these regions, which can manifest itself in price volatility.
On the BlackRock Frontiers Investment Trust plc, these risks are mitigated through careful stock selection and a diversified portfolio of more than 50 companies across many different frontier markets.
Meanwhile, from a sector perspective, financial, consumer and industrial companies account for more than half of the portfolio’s assets. Information technology, which dominates growth exposure across much the developed world, is a far smaller share5, which may make the frontier markets opportunity appealing for any investor looking to diversify away from technology.
Smaller companies
Another source of enhanced growth historically has been achieved through investing in smaller companies. Over the long term, smaller companies have been shown to outperform larger companies6.The reasons for that stronger performance are hotly debated, but it may be due to their flexibility, which gives them the ability to take advantage of opportunities, or their larger addressable markets relative to their size. It should be easier for a business to double in size from £100m to £200m than for a larger business to grow from £100bn to £200bn.
Smaller companies have been out of favour over the past three years and may hold overlooked growth opportunities for investors. BlackRock runs two growth investment trusts focused on the opportunity in UK smaller companies. BlackRock Smaller Companies Trust plc seeks out the fastest growing, most innovative and exciting companies from the available universe of UK growth stocks. BlackRock Throgmorton Trust plc, meanwhile, looks for growth across UK small and mid-cap stocks, and has the ability to enhance growth potential through the use of derivatives.
Conclusion
Given the extent of media coverage of US technology outperformance, one could be forgiven for thinking that growth investing begins and ends with US mega caps. However, history shows that growth themes come and go in equity markets.
It pays to take a broader perspective when looking for growth and BlackRock has a range of growth investment trusts that do exactly that. With talented portfolio managers searching for undervalued opportunities in less popular parts of the market, we’re confident that finding growth in overlooked places can be a successful long-term strategy for growth investors that are prepared to move away from the herd.
