There is a great deal of controversy in the asset management industry as to the exact definition of growth or value stocks.

You can broadly say, however, that in the long term, profits at growth stocks tend to increase at a faster pace than the markets. Investors are prepared to pay for profit growth - good examples would be pharmaceuticals or technology stocks.

Value stocks are regarded as more defensive and less risky in certain market conditions. Food stocks and tobacco stocks are good examples. In general, these stocks perform better in periods of high inflation when they have less difficulty in pushing through price increases to increase their profitability.

Much of the explanation for the outperformance of value stocks in the second half of 2000 was the sharp turnaround in so-called TMTs (technology, media and telecoms). For example, the US Nasdaq index (which has a heavy weighting in technology stocks) just about trebled between the end of September 1998 and March 10th, 2000. This created a classic bubble environment which rapidly corrected itself by falling about 50 per cent between March 2000 and mid-December 2000.

A slowing down in the US economy and numerous profit warnings from leading TMT companies added to investor worries. This sharp turnaround in the Nasdaq index caused a rotation into value stocks which were regarded as much more defensive and, at the then lowly price/earnings valuations, much less risky.

Sentiment in markets towards TMTs remains poor, and worries about the depth of the next economic downturn prevail. The big question for 2001 is whether growth stocks will return to trend and deliver outperformance or whether value stocks will maintain their momentum.

We believe that the move into value stocks is essentially a short-term defensive one and will begin to unwind as investors become more settled about the economic outlook. The fact that value stocks have performed so well over the past year means that their valuations are in many cases more stretched than they were a year ago. The valuation gap between the growth stocks and value stocks has closed a lot.

In recent weeks the turmoil in high growth sectors has begun to throw up some good opportunities in this sector as the worst excesses of the technology bubble have unwound.

While we have entered a global economic slowdown, this is unlikely to lead to a recession. We are still likely to see reasonable rates of growth this year. A slowing global economy and continuing relatively low inflation (ex. oil) is likely to facilitate lower interest rates, in the US and UK, if not in Europe, in the next three to six months. Cuts in rates usually support equity markets, especially growth stocks.

In a slower economic environment, good profit growth will become a scarcer and more valuable commodity. Companies with good growth prospects should begin to outperform again in coming months.

It will be important to focus on stocks which have a lead in their respective sectors or industries. Investors with a long-term horizon should be looking for good opportunities in growth areas.

Eileen Fitzpatrick is managing director of AIB Investment Managers.