Global stocks declined for the second consecutive month in October amid a resurgence in COVID cases across Europe and the United States, deflated hopes for a second round of U.S. fiscal stimulus and increasing uncertainty heading into the U.S. election.
Stock markets rallied back in early November, driven by a combination of progress toward a vaccine and the likely election outcome of a divided government – a scenario that many investors view positively as it reduces the chance of radical policy shifts.
A divided government is also likely to result in a smaller fiscal stimulus package than initially expected under a democratic sweep scenario. A more moderate amount of stimulus would support a low-growth environment going forward, which generally favors high-quality growth companies with the ability to generate consistent earnings.
The fact that some of the high-flying mega-cap growth names have slowed after an epic run does not come as a surprise. Nor does it suggest that the growth rally is done. But it does imply that investors are increasingly searching for high quality companies for which the valuation is in sync with its earnings – an investment style often referred to as “Growth at a Reasonable Price,” or “GARP.”
Investors can employ the GARP strategy by focusing on companies with a valuation that is inline, or better yet, cheap, relative to earnings growth, which can be measured by the price/earnings-to-growth or “PEG” ratio. Using this metric, a couple of themes emerge:
1. Go global. While most of the top earnings-growers on an absolute basis are domiciled in the United States, this does not necessarily hold true when growth is adjusted by valuation. In fact, on a PEG basis, the best scoring companies are evenly distributed across developed markets and emerging markets in Asia.