CYCLICALS WILL SUNSET AS THE WORLD NORMALIZES
As COVID-19 vaccines rolled out, a resurgence of cyclical stocks drove a massive rotation out of growth stocks in the first quarter. Investors took profits in growth stocks to buy beaten-down cyclical stocks, pushing the latter towards pre-pandemic levels. With the big shift having taken place and little growth ahead, recent market activity is signaling that the cyclical rally may soon fizzle. Going forward, the tug-of-war between cyclicals and secular growth stocks should end as both start playing on level ground.
Valuation clouds linger. While strong market returns expanded valuations in 2020, profit-taking in many growth stocks has helped contract multiples. Some secular growth companies that posted stellar revenue and earnings growth during the pandemic will likely see more moderate growth this year (given the higher base), but still attractive growth rates going forward.
A spectacular dawn for secular growth on the horizon. As the world normalizes, fundamentals will go back to leading stock returns. Companies with the most compelling fundamentals and strongest structural tailwinds are better positioned to prosper. Also, technology spending typically leads in recoveries, which should allow the sector to reassert its strength.
A BRIGHT FUTURE FOR DURABLE GROWTH STOCKS
We’re not going back to the same world we lived in pre-COVID. Things will normalize, but there will be key differences in how we live, work, and operate as a society given how massively behaviors changed during the pandemic. We’ve learned to be more efficient through technology and that is unlikely to change. In fact, technology is now woven through every industry and being adopted at breakneck speeds. Below are a few tech-savvy areas that are seeing accelerating demand:
Domination of direct-to-consumer models. The most important driving force for consumers in the global economy is coming from the shift to direct-to-consumer (DTC) business models. DTC companies are gaining massive pricing and staying power as they know how to get the right products to the right consumers at the right time, making for seamless shopping experiences in both retail and online stores.
Fintech revolution rooted in digital payments. With the explosion in e-commerce activity, digital payment platforms that facilitate e-commerce sales are seeing surging demand. But the opportunity for these platforms extends far beyond just e-commerce, especially in emerging markets where these platforms are replacing the limited traditional banking in these regions. For instance, digital payment platforms are enabling off-line bill pay, asset management, and small loans—extremely valuable services that are scaling quickly and creating exciting investment opportunities.
Tectonic shifts in enterprise technologies. Cloud-based applications and services are set to be the biggest transformation for enterprises since the advent of the internet. Just as the power and reach of the internet was severely underestimated, so too is the business-changing potential of cloud applications.
The electric vehicle frontier. The transportation industry is on the brink of a new era as electric vehicles (EV) are poised to turn century-old internal-combustion-engine vehicles into relics in the coming decade. Where traditionally, consumers needed to purchase new vehicles to get the latest technologies, EVs are now being built with components that can be turned on through software subscriptions to enable features like autopilot. This will help reduce the up-front cost of the vehicle while creating recurring revenue streams. As the industry grows, so too will demand for electric batteries, smarter semiconductor chips, and mobility services, providing investors will multiple ways to invest in the EV theme.
PORTFOLIO POSITIONING IDEAS
Position for the release of huge pent-up demand. As economies reopen, there will be soaring demand for things like travel, tourism, and restaurant dining. Increasing exposure to areas can help capitalize on that demand.
Find open-ended growth. While cyclical stocks may have their day in the sun, there are more compelling opportunities in secular areas of the market that will have sunny skies for years to come with sky-high growth potential given their transformative impact on our daily lives.
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.
The views expressed herein are those of Jennison Associates LLC (“Jennison”) investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. This commentary is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services. This commentary does not constitute investment advice and should not be used as the basis for any investment decision. This commentary does not purport to provide any legal, tax, or accounting advice.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
1047746-00001-00 Ed. 5/2021