Serious Money:The four-year bull market in global stock prices continues as market indices edge ever higher, driven by the dash for trash which persists despite an obvious deterioration in the underlying fundamentals, writes Charlie Fell 

Value indices have outpaced growth stocks for seven consecutive years and the superior performance generated by growth indices in the 1990s has been more than erased.

Growth managers are under considerable pressure and, according to some reports, are close to extinction. Perhaps the endangered species should turn to the words of Mark Twain, a distinguished investor in his own right, who noted that reports of his death were greatly exaggerated.

A confluence of factors suggests that now is the time for growth. The excessive performance of growth during the heady days of the late-1990s has gone as value managers enjoy their most extended period of superior performance in modern times. While value stocks edge ever higher, their counterparts languish well below the highs registered seven years ago.

The valuation advantage afforded growth stocks has disappeared and is close to record lows. The premium on price-to-book multiples has dropped to less than 30 per cent despite a more than three percentage point profitability advantage. It is hard to believe the same premium was roughly 300 percentage points during the excess that prevailed towards the end of the 20th century.

Experienced investors will know that an established investment trend dies neither of old age nor expensive valuations. Fundamentals drive performance and valuations, though the indisputable link is often lost on investors. Multiples such as price/earnings ratios are a function of value, which is determined by fundamentals.

Investors often reverse the causality. Growth investors will be pleased to know that trends in fundamentals are moving almost exclusively in their favour.

It is surely common knowledge that the upturn in corporate profits worldwide is grinding to a halt.

The highly paid investment analysts concur as earnings estimates are being revised downward. More importantly, financial market or real-time indicators suggest the same.

The yield spread on government paper, which subtracts short-term interest rates from long-term rates, is negative in all developed economies apart from Japan and Switzerland.

The spread has considerable predictive ability when it comes to corporate profits explaining more than 40 per cent of the variation as much as 18 months in advance. The spread has been negative for several months and the persistence implies that an earnings downturn could begin by the end of the year.

The notion that corporate profitability is under pressure is beyond dispute.

The yield spread is also an important indicator of relative valuation with the premium afforded to growth stocks on reliable measures such as price- to-book or sales increasing as the measure approaches zero.

Unfortunately, the indicator has delivered nothing better than market performance over the past 12 months. Perhaps the indicator has lost its allure in the 21st century and should be consigned to the dustbin. The proposition is tempting but could prove deadly. One swallow does not make a summer.

The valuation metrics used in the late-1990s to justify ever- higher stock prices were appalling, with no theoretical justification whatsoever, and the "tools for fools" became increasingly bizarre as the love affair with technology stocks reached its climax.

The yield spread rests on solid ground and suggested that corporate profitability would come under pressure ages ago.

The shift to growth is assured and investors will quite rightly concern themselves with the implication for stock market direction. The verdict of history is clear on this matter.

Value cycles begin with a bear market as previously favoured growth sectors collapse. The internet frenzy demonstrates this point as companies with little if any economic rationale received funding from increasingly irrational investors.

The collapse was inevitable and the agony endured by growth investors was compounded by the pressure heaped on pharmaceutical companies in the wake of record patent losses and weak research pipelines.

History tells us that stock markets crash into value cycles and drift towards growth as an economic cycle enters its latter stages. The decline in prices of growth stocks has been savage but positive earnings surprises during this reporting season are emanating from traditional growth sectors. Value to be discovered in today's market can be found in growth sectors.