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Stronger-than-expected GDP shines light on share market growth ahead

The better-than-expected expansion in the Australian economy will give backers of high-flying growth stocks an upper hand in the growth vs. value debate.

Our economy grew a seasonally-adjusted 1% in the March quarter, according to today’s data from the Australian Bureau of Statistics (ABS). This is double the rate in the previous quarter and a whopping 0.7 percentage points above the same time last year.

We can thank our miners for the strong result but what is particularly encouraging is the big increase in private investment in machinery and equipment from the non-mining sector.

Equity strategists have been conflicted in their view between growth and value stocks, with the latter posting strong gains over the past year or so to trade at a premium to the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) or their historical averages.

These stocks include the likes of blood plasma company CSL Limited (ASX: CSL), logistics software developer WiseTech Global Ltd (ASX: WTC) and data-centre operator Nextdc Ltd (ASX: NXT). Investors are happy to cough up to buy these “expensive” stocks for their earnings growth certainty.

In contrast, several stocks that have not joined in the rally are starting to look increasingly cheap and that is driving the debate on whether it’s time for investors to switch their focus on the better value category.

Some examples of value stocks include engineering group Downer EDI Limited (ASX: DOW), iron ore miner Fortescue Metals Group Limited (ASX: FMG) and power utility AGL Energy Ltd (ASX: AGL).

Value stocks typically perform better in the late stages of a bull market but today’s GDP reading shows that there’s more room for growth stocks to outperform as just about all parts of our economy are firing up.

While construction of new dwellings is easing as home prices soften, it remains at high levels that are consistent with the number of building approvals over recent months.

Government investment is down slightly but that too remains at elevated levels, according to the ABS.

Even household spending is growing. Consumption increased 0.3% in the quarter although that’s driven by non-discretionary spending. This could indicate a pick up in inflation and it shouldn’t give shareholders in our leading retailers like Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) a reason to smile.

The thing that could worry economists though is a further fall in household savings. The savings ratio dropped to 2.1% – the lowest since December 2007.

It’s too early to quit growth stocks but this shouldn’t stop bargain hunters from selectively picking quality value stocks either.

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Motley Fool contributor Brendon Lau owns shares of AGL Energy Limited and NEXTDC Limited. The Motley Fool Australia owns shares of WiseTech Global. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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