With slowing global economic growth, it’s becoming more difficult to find high-growth companies. Additionally, there are lower market return expectations at this point in the economic cycle. The combination makes it more challenging for investors to find attractive growth opportunities to meet long-term investment goals. Mark Baribeau, CFA, Head of Global Equity at Jennison Associates, answers five questions below that make the case for growth equities now.
What is your outlook for growth equities in these later stages of the cycle?
With global economic growth moderating, there are fewer high-growth companies to be found. We think growth as a broad-based investment style may run into some issues if global growth runs out of steam, and the past 15 to 18 months already reflect some moderation in that growth. However, regardless of global growth trends, companies can remain cutting edge in making our daily lives more efficient with new products and services, which will drive consumer demand and sales growth. This is reflected in the stock prices of companies with strong secular trends and innovative products, which are better positioned to weather economic headwinds over the long term.
Faster growth is becoming tough to find
Source: IMF, Data from 1/1/97 to 12/31/18.
This chart shows the change in the percentage of stocks in the MSCI ACWI with a greater than 10% revenue growth from January 1997 to December 2018, plotted against the annual percentage change in world real GDP growth.
With the U.S. leading the world in terms of economic growth, why should investors consider international markets?
While both the global and U.S. economies are growing, they are doing so slowly. Although many international regions are currently more economically challenged than the U.S., it’s important to remember that economic growth isn’t the only source of growth for companies. Secular growth companies benefit from structural changes to the economy and changes in consumer behavior, making it possible to source more attractive growth prospects benefiting from strong long-term trends internationally.
For example, consider China’s dire need of better long-term health care options given their huge aging population and high cancer rates (twice that of the U.S.). This has helped China become home to the second largest pharmaceutical market in the world. With China opening up its health care market in recent years with new regulatory rules encouraging innovation, the Chinese pharmaceutical market is now becoming more investable as drug development is accelerating, local talent is growing, and venture funding is increasing. As a result of China’s institution of a “priority review” of innovative overseas drugs to speed up approvals, we’ve also been finding innovative companies in the U.S. and Europe that are developing necessary health care solutions for the Chinese market. Due to the persistently high demand for their products and services, we expect these companies to maintain their growth trajectory and be more insulated should the economy worsen in any of those regions.
What’s the investment appeal of disruptive companies and can you provide an example?
Disruptive companies have historically been rewarded with strong growth for many years—40-80% annually, sometimes more. These companies often have difficult-to-replicate business models that create significant competitive barriers, and they typically benefit from long-duration secular tailwinds. More importantly, these disruptors can be extremely profitable, which makes for great alpha-generating investments over the long term.
Adyen, a Dutch payment services provider, is an excellent example. Even before its IPO, Adyen had a first-class client list, including large online vendors like Netflix and Uber. Adyen developed a digitally native payments processing system with the e-commerce and Internet-age in mind. Its single, cloud-based platform provides updates to clients worldwide. That saves time and resources, as Adyen manages and administers the system centrally and merchant clients have the latest capabilities and updates with the push of a button. Adyen is, in fact, perfectly positioned for the current and future market.
What are the most attractive investment themes you see in today’s market?
Our fundamental research and stock selection naturally uncovers strong secular themes over time. Based on this, we are seeing compelling growth opportunities in on-demand consumption, enterprise technologies, global consumer, digital payments, robotics and autonomy, and health tech and therapies. In these areas, we are finding innovative companies developing new exceptional technologies that are challenging tradition-bound industries that are unwilling or unable to adapt. These companies are displacing incumbents, reshaping the global landscape and transforming our daily lives, all while offering strong investment growth potential. Learn more about the themes in Finding the Market Leaders in the NEXT Economy Opens in existing window.
What do you think is the best approach for investing today?
In general, we think successful growth investing requires a selective and active approach focused on carefully weighing the long-term opportunities versus the risks. Today’s higher macroeconomic and political risks will continue to create noise in the markets. We believe this creates a significant opportunity for bottom-up managers who can see through the noise and add value by investing in secular growth companies at their inflection points of growth. The catalyst that drives the inflection in growth can be found in companies developing the latest disruptive products and services that customers demand. We believe these secular growth companies can be found in all market and economic conditions.
View the full Q&A PDF opens in a new window, to learn more about the team's views and investment approach.
The MSCI All Country World Index is a market capitalization-weighted index designed to provide a broad measure of equity-market performance throughout the world. It is made up of stocks from both developed and emerging markets, comprising approximately 23 developed and 26 emerging market country indexes.
All investments involve risk including the possible loss of capital. Investing in the technology sector and in securities of technology-related companies in other sectors will be more affected by the performance of the technology sector than a more diversified portfolio, 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 the investment return. Investment strategies such as diversification and asset allocation do not guarantee a profit or protect against loss in declining markets. Past performance is not a guarantee of future results.
The views expressed herein are those of Jennison Associates’ investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither Prudential Financial, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation.
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