Nearing a Turning Point for Growth Stocks
Jennison Associates' Mark Baribeau discusses recent global market dynamics and where he’s finding resilient secular growth trends amid continued volatility.
Growth equities have de-rated significantly over the past several months, reflecting market uncertainty about the path of interest rates, inflation, economic growth, and the war in Ukraine. Technology stocks have been hit especially hard, due in part to rising interest rates and questions regarding the sustainability of high revenue growth. During COVID-19, locked-down consumers and businesses turned to technology products and services. As the pandemic recedes, however, market participants appear to be questioning whether this demand was simply pulled forward or represents a structural shift in underlying demand.
We believe technology-driven growth has settled at a higher, sustainable level, driven by the investments companies realized they needed to make during the pandemic. These were, in many cases, already in progress at the onset of COVID-19. Corporations were digitally transforming their operations and businesses, but at a measured pace. When the pandemic shut down the global economy, however, these efforts accelerated, as people went online to work, shop, communicate, and find entertainment. When restrictions were lifted, remote access continued to allow individuals to remain productive personally and for work, regardless of their location.
Many corporations have become more productive as well. When consumers moved a large part of their shopping on-line, retailers and brands were forced to provide a robust online offering or lose out to competitors. As consumers return to reopened stores, we expect the online experience will continue to be an indispensable part of retail strategy.
An enabler of digital transformation has been cloud technology. Software was once installed via a cumbersome process, where discs were loaded onto a server and then pushed out to PCs and rudimentary mobile devices. Today, software companies offer their products through cloud-based services (software-as-a-service, or SaaS), making them available via a mobile app or browser. This change in how data is stored and distributed has allowed companies to update their products in real time with virtually no disruptions. It has also given employees instant access to the enterprise from any location, driving significant increases in efficiency and productivity.
We believe the use of cloud-based applications will only grow as the next generation of broadband communications infrastructure—or 5G—is rolled out. We also see significant potential opportunities in artificial intelligence (AI) across the economy, including industries such as automotive and healthcare. For automobiles, AI will further the pursuit of full self-driving and a related range of services, including navigation and car insurance. In healthcare, AI-enabled insurance companies can use customer data in a range of ways to improve care—e.g., to warn individuals of impending health issues, monitor medicinal intake, or simply schedule checkups.
These developments will depend heavily on the ability of cybersecurity to keep pace. Rising data speeds and user interactions are resulting in more user data, placing an even higher premium on keeping that data secure. Before, when data was held within the four walls of a facility owned by the company, security infrastructure and patches were maintained onsite. Cloud-based applications and their data, however, are potentially vulnerable to a wider range of threats. They require much more sophisticated and complex measures to prevent the next generation of hacking or leaks.
These secular growth trends in technology—cloud computing, the 5G network, and cybersecurity—accelerated during COVID-19, but they are part of a larger story. The technology industry has gone through many cycles. The pandemic represented the start of another cycle which, in our view, will be dominated by these secular themes over the next 5 to 10 years.
We believe companies will continue to make investments in technology, despite recent uncertainty and rising interest rates. These investments are, for many companies, mission critical for their growth and to maintain leadership positions in their industries. They are also a potential source of cost reduction, mitigating spending in other areas of infrastructure, such as facilities management. While technology spending is returning to a more normal rate, our research suggests that the digital transformation has become a higher priority than it was before the pandemic.
We acknowledge that the geopolitical environment and future economic growth is uncertain. This could lower demand for technology in the short term, but, as long-term investors, we’ve experienced negative market environments before. We continue to believe that, beyond current market volatility, technology will drive secular growth trends over the next decade, potentially offering significant opportunities to investors.
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 exists when particular investments are hard to sell; geographic concentration 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 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. Investing in the technology sector and in the securities of technology-related companies in other sectors will be more affected by the performance of the technology sector than investments that are more diversified, thereby increasing vulnerability to economic, political, or regulatory developments impacting technology companies and companies that rely heavily on technology, which will have a greater impact on returns.
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.
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