For ‘growth’ companies, interest rates are an important factor in their valuation.
Growth companies have typically performed better when rates are lower. This is because their valuations are often easier to justify based on their earnings out into the future.
However, if interest rates move higher or are expected to be higher in the future, it can lead to consumers slowing down on spending and those future earnings could be compromised.
For ‘value’ companies it’s a little different.
They’re typically more mature and have more stable earnings. Value companies have normally performed better when interest rates are rising because investors are less willing to pay up for earnings way out into the future. Value companies already generating stable revenues can offer investors more certainty.
This article isn’t personal advice. Remember, investments and any income from them can rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment’s right for you, ask for financial advice.
Where’s been the best place to be?
Growth has typically been the place to be over the long term.
Over the last 10 years, the MSCI North America growth index has returned 415.97% compared to 171.96% for the MSCI North America value index. Past performance isn’t a guide to the future.
But during this time, US interest rates have never been as high as they’ve been recently.
During 2022, for example, as interest rates rose from 0.25% to 4.25%, value stocks outperformed significantly.
What could be next for rates and growth and value investors?
As interest rates peaked in 2023 at 5.5%, history has shown that when interest rates are above 4%, value has tended to outperform growth.
Anything below 4%, then growth has had the edge – remember though, past performance isn’t a guide to the future.
With inflation falling closer to the Federal Reserve’s (Fed) 2% target, as well as a robust economy, the Fed have finally decided to start cutting interest rates.
They’ve cut interest rates twice this year so far, from 5.5% to 4.75% and have signalled that there’ll be future cuts.
When will this be though?
Investors had expected interest rates to fall much sooner than they did, and the Fed have typically taken a cautious approach.
Current expectations are that rates will continue to fall and by the end of 2025, interest rates will fall by a further 1%. But the Fed have said they’ll always be driven by the data.
If the US economy remains strong with low inflation, it could keep interest rates higher. But if it the economy starts to slow, it might increase the pace of cutting.
Will the new president have any impact?
Although the president doesn’t have a say on the Fed’s decisions, their economic policies, both spending and borrowing, can have an impact, especially on inflation.
As inflation rises, interest rates often rise to try and slow down spending.
With Trump promising tariffs on imported goods into the country, businesses might decide to pass on those costs to consumers as well as delivering tax cuts to encourage spending and growth.
We could see inflation reignite and start to rise again. If this was to happen the Fed could start increasing rates again.
Growth versus value – 2 fund ideas
Whether you think rates will fall as expected or stay longer for higher, here are two fund ideas that could benefit.
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, use the links to their factsheets and key investor information.
Growth idea – Baillie Gifford American
The Baillie Gifford team aims to grow an investment by investing in businesses with exceptional growth potential and holding them for long enough to reap the rewards.
The team of four is led by Tom Slater who has over 20 years of experience. The managers have identified a number of powerful trends, along with many highly-innovative businesses driving them and disrupting old ways of doing things.
The fund mainly invests in larger companies, but also has a small amount in smaller companies, which are riskier.
We like the managers' long-term, disciplined investment process and think they’re well equipped to succeed in navigating the world's largest stock market.
The fund can be concentrated, investing in 30 to 50 companies and can often perform very differently to the benchmark – this can add risk.
Investors should also note that this fund has one of the highest ESG (environmental, social and governance) risk profiles of the 100 funds under research coverage. The companies within the fund could therefore face increased regulatory scrutiny, reputational damage, and operational challenges, potentially impacting the fund's future performance.
Oct 2019 To Oct 2020 | Oct 2020 To Oct 2021 | Oct 2021 To Oct 2022 | Oct 2022 To Oct 2023 | Oct 2023 To Oct 2024 | |
---|---|---|---|---|---|
Baillie Gifford American | 102.29% | 27.30% | -49.78% | -3.43% | 48.17% |
IA North America | 10.19% | 32.96% | -2.19% | 1.62% | 28.05% |
Value idea – BNY Mellon US Equity Income
The BNY Mellon US Equity Income fund aims to invest in companies that manager John Bailer believes can deliver a balance of a good income today, and dividend growth in the future.
Bailer has close to 20 years’ experience of investing in the US stock market. He also uses BNY Mellon’s extensive research team to help him keep a close eye on company valuations. This involves making sure he doesn’t overpay for a company and that they can help provide stable long-term returns.
Bailer currently sees opportunities in the financial services sector with 26% of the fund invested there. However, the fund can be concentrated, so each investment can have a big impact on performance, increasing risk. There’s also the flexibility to use derivatives which increases risk and charges are taken from capital.
Investors should also note that this fund has one of the highest ESG risk profiles of the 100 funds under research coverage. The companies within the fund could therefore face increased regulatory scrutiny, reputational damage, and operational challenges, potentially impacting the fund's future performance.
Oct 2019 To Oct 2020 | Oct 2020 To Oct 2021 | Oct 2021 To Oct 2022 | Oct 2022 To Oct 2023 | Oct 2023 To Oct 2024 | |
---|---|---|---|---|---|
BNY Mellon US Equity Income | -15.39% | 44.08% | 24.79% | -3.02% | 20.76% |
IA North America | 10.19% | 32.96% | -2.19% | 1.62% | 28.05% |