Overpriced growth equities could be a risk heading into the final market sessions of 2019, according to global investment firm Morgan Stanley. They do suggest that defense is still the best option for investors looking ahead to 2020.
“We still think the greatest risk in the equity market remains in growth stocks where expectations are too high and priced,” wrote Morgan Stanley’s Chief U.S. Equity Strategist Michael Wilson. “From a sector standpoint, this is consumer discretionary broadly and expensive software and secular growth stocks.”
“Focus on what you own, not how much,” he added.
Wilson sensed the frothiness in growth stocks as soon as the central bank was cutting interest rates this year.
“Since the Fed began cutting, (discretionary and other growth stocks) have underperformed the S&P 500 and appear to be breaking down on a relative basis,” Wilson wrote. “Importantly, these groups underperformed on Friday when the market was up and earlier in the week when the market was down.”
“Despite a big rally in stocks, we continue to position our overweights /underweights away from growth and toward the more defensive parts of value (Staples, Utilities and Financials),” he added.
From a relative value ETF standpoint, this could put value over growth equities and defensive over cyclical equities in play. Particularly, the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG) and the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC).
RWVG seeks investment results that track the Russell 1000® Value/Growth 150/50 Net Spread Index. The fund, under normal circumstances, invests at least 80% of its net assets in securities that comprise the Long Component of the index or shares of ETFs on the Long Component of the index.
RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Value Index (the “Long Component”) and 50% short exposure to the Russell 1000® Growth Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value.
RWDC provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors. RWDC tilts towards defensive sectors like health care and consumer staples as shown in the fund’s breakdown. Conversely, it shorts names like the top technology giants that skew towards momentum.
For more relative market trends, visit our Relative Value Channel.