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Seven genuine growth shares

Should investors start being fussier about the price being paid for 'growth'?
November 17, 2016

By historic standards the FTSE All-Share looks pretty expensive based on its 12-month forward price/earnings (PE) ratio of 14.6, which is comfortably within the top fifth of the 10-year range. There's also a growing feeling that a rise of populism could herald a tightening in monetary policy in developed markets. These circumstances may mean growth investors will need to be on their guard.

The basis of this view is that for many years extremely low 'risk-free' government bond yields have increased the attractiveness of earnings growth, which in turn has pushed up the ratings commanded by growth shares. However, with bond yields rising, investors need to value future earnings against a higher 'risk-free' alternative and will no longer be able to justify putting such a high rating on earnings expected several years out. This creates the potential for a derating of high-priced growth shares.

Indeed, looking at quarterly forward PE data for the FTSE All-Share, the index's top decile PE has fallen by almost a tenth since ratings peaked in mid-2015, whereas the top quartile PE has experienced a more modest 6.5 per cent derating.

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