NEARING A TURNING POINT FOR GROWTH STOCKS
Aug 29, 2022
Jennison Associates’ Mark Baribeau discusses recent developments influencing global markets and where he’s finding resilient secular growth trends amid continued market volatility.
A BRUTAL FIRST HALF WITH GROWTH STOCKS NEARING A BOTTOM
The global market sell-off intensified in the second quarter as the Federal Reserve displayed an increasingly hawkish posture. Higher bond yields pushed bond prices down as recession fears weighed on equity markets.
In June, the initial impact of the Fed’s tightening efforts started to become evident in data points indicating cooling housing prices and slower economic growth. This earnings season will be telling in terms of the impact on corporations, with reduced corporate earnings growth expected as an overriding trend. On the bright side, investors started migrating back toward secular growth stocks, which began outperforming value stocks in June. While it’s too early to say if we’ve yet to see the bottom for growth, we think we’re getting closer after the big valuation contraction. We believe a turning point should come as supply chain issues ease and inflation starts to recede in the coming months.
Valuations for growth versus value stocks, which showed growth selling at a steep premium during the COVID market rally, are now below long-term averages. As the economy slows down, we expect investors to favor companies with visibility, stability, and consistency in terms of earnings growth. While scarce, these are necessary attributes to weather downturns. As a result, growth stocks that are driven by secular forces with robust non-cyclical demand should fare well.
RESILIENT PATHS TO FUTURE GROWTH
We continue to find the best growth opportunities clustered around the same secular themes that we’ve seen drive profit growth and market leadership in recent years. Given the rapidly changing macro environment, we’ve increased our exposure to these themes through growth companies with stronger quality characteristics (e.g., better cash flow generation, lower multiples) to better weather economic downturns and continued volatility. Examples include:
- Electric vehicles. This is the single biggest structural shift poised to unfold over the next decade, with fast-growing demand for electric vehicles and components such as electric batteries, semiconductors, etc.
- Health care innovation. There are exciting new product cycles beginning in many health care segments (e.g., obesity management, oncology therapeutics) as well as specific areas that should benefit as the world normalizes from pandemic-related restrictions.
- Luxury goods. High-quality European consumer brands continue to see strong growth driven by younger demographics. These brands enjoy strong pricing power marked by demand that outstrips supply, and multi-year waitlists.
- Fintech. Emerging markets tend to have less sophisticated financial systems, creating big opportunities for powerful fintech platforms to fill the void in meeting the banking and payment needs of these regions.
- Enterprise technologies. Valuations are compressed among prominent cloud-based service providers even as they continue to see strong demand—factors that make these cloud companies more attractive than higher multiple software-as-a-service companies that have less promising near-term earnings prospects.
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Mark Baribeau, CFA
Managing Director, Head of Global Equity
Jennison Associates
FULL BIOGRAPHY
Risks— Investing involves risks. Some investments are riskier than others. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, and political and economic uncertainties. Investments in securities of growth companies may be especially volatile. Due to the recent global economic crisis that caused financial difficulties for many European Union countries, eurozone investments may be subject to volatility and liquidity issues. Illiquidity risk, which exists when particular investments are hard to sell; geographic concentration, which can result in more pronounced risks based upon economic conditions that impact one or more countries or regions more or less than other countries or regions; and derivative securities, which may carry market, credit, and liquidity risks. Emerging markets are countries that are beginning to emerge with increased consumer potential driven by rapid industrial expansion and economic growth. Investing in emerging markets is very risky due to the additional political, economic, and currency risks associated with these underdeveloped geographic areas. Value investing involves the risk that undervalued securities may not appreciate as anticipated. It may take a substantial period of time to realize a gain on an investment in a small or midsized company, if any gain is realized at all. Asset allocation and diversification does not guarantee profit or protect against loss. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost.
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