Why growth, why now?
Tim Garratt considers the outlook for growth stocks after a challenging period of rising rates and two-way volatility.
It’s been a tough couple of years for growth investors. A nasty cocktail of rising rates and extreme risk aversion drove huge market swings, leading to considerable volatility in share prices.
Understandably, people have been asking whether growth investing can still generate attractive returns from here, but history suggests that this would be the wrong time to throw in the towel.
Previous market shocks and sharp drawdowns in growth equity funds have been followed by huge returns over the ensuing decade.
There is every reason to believe that this time will be no different.
Amid growing constraints around the availability of capital, environmental resources and free trade, one force is heading in the opposite direction. Computer intelligence is spreading fast. In the next decade, machine learning seems likely to turn every single industry on its head.
Some businesses are better placed than others to cope with these shifts.
What are their characteristics?
They solve real-world challenges
Some companies are turning headwinds into opportunities, providing innovative solutions in areas such as ecommerce, healthcare and banking.
For example, Samsara is putting telematic systems in trucks and warehouses to improve productivity and cut pollution within the logistics industry; Mercado Libre is using technology to lower the costs of banking, payments and savings across Latin America where 70% of people don’t have a bank account; Dexcom has transformed how people manage diabetes at home, reducing the burden on hospitals.
They have execution discipline and financial strength
With higher interest rates, the benefits of strong balance sheets come to the fore. The stock market associates growth companies with dubious financials but this stereotype is misplaced. We see many growth companies with disciplined leaders using financial strength and competitive edge to push through price increases, grow revenue and continue to invest for the long-term.
For instance, Adyen, which provides a platform that simplifies local and worldwide payment methods, stood firm with its pricing, even when competitors lowered fees in the USA. Netflix has increased monthly subscription rates several times over the last few years and is generating new revenue from advertising.
They are adaptable
With big shifts to navigate, companies need an adaptable mindset and evolving business approach. Take tractor company, John Deere, founded in 1837 but now integrating technology into agriculture. It uses computers, cameras and machine learning for high-precision crop spraying, which massively reduces the volume of herbicide required – great news for the environment and a farmer’s costs.
Another example is Shopify, which provides all the tools to set up a shop on the internet, and has created a new suite of machine learning capabilities to transform online retail. Shopify merchants can now use their AI tools to automate repetitive processing tasks, write product descriptions and analyse sales – saving them time and money.
There is no neat way of modelling corporate adaptability in a spreadsheet, but companies will pull ahead of the competition if they continue to experiment in order to adapt.
Rewarding patience
The market’s current obsession with the monolithic ‘magnificent seven’ means that a large cohort of companies with excellent fundaments is being overlooked. Given the dynamics above, it feels like once-in-a-generation opportunity to be a growth investor.
