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Finding Secular Growth with Grit
May 9, 2022
Jennison Associates’ Mark Baribeau discusses where he’s finding secular growth opportunities that can be resilient through continued market volatility.
A Rough Quarter for Global Equity Markets
Elevated market volatility drove a sell-off in global equity markets in the first quarter. Europe was hit hardest with a deep sell-off from the invasion of Ukraine. Emerging markets were weak given rising geopolitical uncertainty, a strengthening U.S. dollar, and increased concerns over Federal Reserve tightening. The panic and reflux trade post invasion is now over and markets have shifted their focus back to general macro drivers. Going forward, emerging market regions that have already cycled through macro drivers, like central bank tightening, may offer better growth opportunities.
- Macro wildcards to continue to drive uncertainty. Bond markets reeled as the Fed turned hawkish, indicating inflation was no longer a transitory risk, but a structural one that may need heavy lifting to be controlled. Bond yields marched higher, flattening the yield curve and raising recession fears. While surging oil prices further fueled recession risks, so far, it hasn’t had much of an impact on high-velocity economic indicators or company earnings reports. Still, recession is a wildcard that could strip a percentage point of growth out of consumer spending in the U.S. alone.
- Compressed growth stock valuations. The raging debate on valuation for growth stocks has abated as the sell-off has erased the COVID premium on growth versus value stocks. Relative valuations for growth versus value stocks are back to 2019 levels, while growth stocks are now trading near their own long-term averages. Additionally, growth stocks cleared some big hurdles in the quarter, putting to bed some of the post-COVID debates about demand pull-forward versus sustainability of growth. Price-to-earnings to earnings growth (PEG) ratios dropped sharply as growth stock P/E multiples contracted while earnings fundamentals remain robust, creating potentially attractive entry points for investors.
Catching Secular Waves Without Fighting the Fed Tide
We continue to find the best growth opportunities clustered around the same secular themes we’ve seen drive market leadership and profit growth over the past two years. But, we’re not going to fight the tide (or the Fed). Instead, we are focused on finding secular growth opportunities that can weather the changing macro environment.
Examples include:
- On-demand consumption. Consumer brands with direct-to-consumer (DTC) business models are thriving. In particular, high-quality European consumer brands have been strong. They’ve been pioneers in the DTC movement, giving them strength in distribution control, inventory management, and pricing power. The resiliency of these brands is even more important in uncertain times like today.
- Digital payments. While not a new theme, enablers of digital commerce continue to see robust results given the continued rapid growth of e-commerce.
- Enterprise technologies. Higher valuation cloud-based software application companies may be prone to more valuation pressure as the Fed continues to raise interest rates. But prominent cloud-based service providers continue to see strong demand and have also seen valuations compress to reasonable levels, making them attractive investment options.
- Health care technology & therapies. The market sell-off in the first quarter created an opportunity for health care companies that were not COVID beneficiaries, but could be beneficiaries of the continued economic reopening and increased demand for various treatments that were delayed because of the pandemic. These areas tend to be less cyclical and could shine as Fed tightening takes a bite out of economic growth.
Mark Baribeau, CFA
Managing Director,
Head of Global Equity,
and Global Equity Portfolio Manager
Mark Baribeau, CFA
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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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