Il y a tout juste un an, le potentiel des titres « Growth » – et en particulier des valeurs liées aux technologies – semblait encore illimité. Toutefois, la réalisation que la hausse de l'inflation n'est finalement pas si temporaire et le signal clair des banques centrales que les taux d'intérêt vont augmenter semblent avoir donné du fil à retordre aux investisseurs de style « Growth ». Jack Neele et Richard Speetjens abordent ce sujet dans notre dernier podcast.
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Jack Neele (JN): One of the lessons is that you seem to never learn, right? Because I've been through the Nasdaq bubble. I've been through the great financial crisis. And now, again, this correction in growth stocks. It always seems to come back, obviously, in a different way. And sometimes it feels as if you haven't learned, let's say. You've been through it multiple times. And then again, there's this tough period.
Male voice: Welcome to a new episode of the podcast.
Erika van der Merwe (EM): A year ago today, the scope for growth stocks and particularly tech-related growth companies still seemed boundless. But the recognition that higher inflation is not so transitory after all, and the clear signaling from central banks that interest rates will ratchet up, appear to have given growth investors a run for their money. My guests are Jack Neele and Richard Speetjens. They are portfolio managers for the Robeco Global Consumer Trends strategy. Welcome, gentlemen. Good to have you here. Is that a fair assessment of what you're seeing in the markets? What's been driving the underperformance of growth stocks over the year to date?
JN: Well, I think that the increase in long-term interest rates has definitely been a catalyst. I mean, the US ten-year yields have risen from, I think they've basically about doubled since the beginning of the year, from 1.5% to around 3% currently. But I think the real problem was the starting point and the starting point was really high valuations for many of the growth stocks, especially during the pandemic period. There was a lot of scarcity of growth basically, and it led to elevated valuations for growth stocks. And obviously now coming out of the pandemic, we've seen growth rates decelerate. And that, coupled with the rise in interest rates, has, I think, led to a severe underperformance of growth stocks so far this year.
EM: Richard, explain to us why are high interest rates a problem for growth stocks?
Richard Speetjens (RS): Well, I would say a lot of the growth stocks are growth stocks because a lot of the value of the company depends on future cash flows. So a lot of the growth is, let's say, a lot of the asset growth and asset realization will happen in the future. So a lot of the growth is dependent on future cash flow. So interest rates are important because you discount those future cash flows at that discount rate. So higher interest rates means lower valuation. And I think a lot of, certainly in times when growth was scarce and there was a lot of growth in these…, they were investing a lot for future growth, the investment horizon of many investors was very long. And now with interest rates rising, of course, and the uncertainty we see in the political environment and economic environment, the investment horizon shortens. So that also means that people don't want to look out that far as they did in the past. So they look more at what is the free cash flow generated in the next couple of years instead of the next ten years. And that, combined with, let's say, a rise in interest rates, has caused the collapse in many of these high-growth stocks.
EM: How worried are you about this outlook? You spoke about investment horizons shrinking. So how concerned are you about the outlook for growth equity in particular? Now, have a listen to this before you answer.
Audio fragment 1 - Larry Fink: The market has recalibrated itself. We witnessed now a change in policy in the Federal Reserve. We raised short rates. We have… So we saw a recalibration of growth stocks. That's principally the majority of the downfall. There's greater recognition that inflation is not transitory. It is probably with us for a number of years. And that's the type of inflation that I don't believe the Federal Reserve has the policy or the tools to do much with it right now.
Audio fragment 2 - Jamie Dimon: The Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or Andrew or something like that. And so you’d better brace yourself.
EM: So that latter voice, as you probably know, is Jamie Dimon from JP Morgan Chase, speaking at a conference sponsored by AllianceBernstein. The first was BlackRock's Larry Fink, of course. So are you concerned, either of you, about the so called hurricane, Jack?
JN: Well, in terms of hurricane, obviously, we don't know what's coming, but we have seen that inflation has been, instead of transitory, that was the buzzword about a year ago, it now seems to be much more persistent. So that can mean higher interest rates may also persist for longer and may even rise further after 2022. So that's definitely a negative backdrop, let's say a more difficult period for growth stocks than, let's say, much of the tailwind that we've had for the past ten years. At the same time, though, I do think that if we look at, for instance, the valuations within our strategy, then we've definitely seen a bump during the pandemic. But basically with the correction that we've seen so far this year, those valuations are more or less back to where we were pre-pandemic. So from a valuation standpoint, I would say things are pretty much back to more rational levels. And obviously that's something we can build on, I think, with growth stocks. There's still the higher earnings growth for many of the companies in our strategy. So I would say that with a more reasonable valuation, bodes well for a 3- to 5-year investment horizon. But at the same time, we shouldn't forget that we're coming from a period of basically the best overall environment for growth stocks, and it's going to be significantly more difficult going forward.
EM: You've spoken about the outlook and about valuations now being more rational. What about the secular, the underlying secular trends that you build the strategy around? Richard, perhaps if I put this to you. Has this changed in any way?
RS: Well, if you look at, let's say, the longer-term trends we have been exposed to, I don't see a big change in dynamics. I mean, the digitalization of, let's say, many consumer industries is still going on. The rise of the emerging middle class is still a very long-term trend which will continue and also the increased focus on health and well-being.
EM: So those are the three trends?
RS: Those are the three main trends we are exposed to in our strategy. But I think, so they haven't really changed. I think what has changed is, like Jack already mentioned, what people are willing to pay for this higher growth. And coming back to the topic on inflation, I think it's also important in this stance to make a difference between the impact it has had on interest rates, but also the impact that it can have on the profitability of your underlying companies. And I think the way we have invested within our strategy has been very much focused on companies with a strong market position, in very often cases also high pricing power or strong pricing power. So they have the ability to put through these cost increases to their customers as well; it might come with a delay. The big risk, of course, there is that it might lead to some demand destruction. But I would say the strength these companies have, the position they have within these underlying strong trends, is still very much intact. And that's also what we mean. We think remains the key driver for future returns, as well as the underlying trends is still very much intact and the companies are well positioned within those trends.
JN: Yeah, if I can add on to that, I think obviously we're not going back to paying with cash, right. I mean, that digital transformation is, for instance, is still continuing and you're paying more contactless or maybe with your smartphone. And probably the days that we've paid with cash are mostly behind us. And that holds for most of these long-term trends, that they are still very strong from over a 3- to 5-year period. I would say, though, that over the short term, if you look at the pandemic, the acceleration that we've seen and the deceleration that followed that acceleration, I think net-net, that's probably been a negative for growth stocks because as you know, the best environment for growth stocks is one where economic growth is relatively slow and on a relatively stable level. So the big swings we've seen make it much more difficult for investors to estimate what the sustainable growth rate for many of these companies is. And basically, that's where we are right now. Investors are struggling to see what is, let's say, the growth rate for many of these companies over the next 3 to 5 years. Whereas previously you could just look back at what they've been delivering over the previous years and could basically extrapolate that a little bit going forward. And that's much more difficult today.
EM: But aside from the uncertainty, if going back, as you said, during the pandemic, I mean, speaking to you at that time, you said these trends, these secular trends have been accelerated. So by implication, they've slowed down a little bit now. But does that mean that the extent to which you can monetize that or benefit from that as an investor has also been dampened? And it might also be that it's accelerated to such an extent that it doesn't have that much run rate left after this?
RS: Well, I think you have to look at it sub-industry by sub-industry. So there are certain industries where indeed you saw it as acceleration during the pandemic. And then, of course, the comparisons get tougher and you get this optical slowdown. And now, of course, we are going to the end of that phase where that optical slowdown might stop. But then the question is what will be, let's say, the medium-term growth versus what it was pre-pandemic. But there are some areas where, of course, for example, digital penetration has already increased. So in some cases, for example, like in in e-commerce and some categories, we might see e-commerce penetration already pretty high. So that means that optically and also the law of large numbers means that this growth will slow down going forward. But this is exactly the phase we're in right now is that investors need to find out what is the medium-term growth outlook for many of the sub-categories and subsectors and that's why there is so much uncertainty right now.
EM: You just don't know. How hard is it for you in this environment, an environment likely in which there'll be slower growth. How hard will it be for you to find those companies that you describe, the ones that have the market share, that are able to pass on price increases; so, those resilient and profitable companies?
JN: Well, I think it's basically not different than what we normally do. I mean, we are still looking for these longer-term structural trends, looking for the companies that can benefit most from these trends. So that's basically the same independent of the overall environment. What we do see is that there's been, as we talked about earlier as well, that there's been much more focus by the market on the valuations for many of these companies. So many investors are probably not willing to underwrite these aggressive growth strategies that are unprofitable right now, because we've basically seen that many of the unprofitable companies have been hit the hardest in this correction. So it's more or less looking for companies that can offer sustainable growth, but couple it with a more attractive valuation. And those are probably also the type of companies when investors return to growth stocks, these are probably also the companies they'll come back to first because it will probably take them a bit longer to come back to the aggressive growth names where, in part due to the collapse in the share price, also to some extent, the story has changed, because it's taken a significant toll on many of these companies that are having trouble to retain employees, because obviously there's a lot of share-based compensation in many cases, which is, well, totally disappeared in some cases. So the environment for these companies is tougher. And that makes it also more difficult, I think, to come back to them.
EM: Were there also some lessons learned from the internet crash in the early 2000s, with exactly that: investors overpaying for this blue sky.
RS: Well, I think a big difference, but certainly there are similarities, but I think a big difference between a lot of the hype we saw in the early 2000s was that a lot of the very highly valued companies didn't have a business model or a very good revenue model at that point in time. Whereas if you see many of the companies, of course, there were a lot of high-value companies as well, but most of them have a proven business model, have already shown free cash flow, (though) not all of them. So certainly there were some segments where you could say there was some similarity with those because people were indeed willing to pay for cash flows, which might come in 5 to 10 years down the road. And those have now corrected, of course, sometimes 70 or 80% or even more. But I think it's a much smaller part of the market than it was in the, let's say, early 2000s, where a big, much larger part of the market was much more driven by concept and less by a really underlying business.
EM: Let's look at some of the more exciting things you're seeing. What are these developments right now, whether it's in technology or just consumer behavior that excites you? We know the metaverse is a huge buzz, for instance, or I've also seen some of your writings on the subscription economy. So what are some of these themes?
JN: Well, metaverse is definitely something that we've looked at and research, but we think that that's still very early in terms of opportunity, that will probably take five, ten years to fully develop. And there's obviously a lot going on right now. But this is still something we expect to play out over probably a 5-to 10-year horizon instead of right now. But for instance, the electrification of vehicles is definitely something that we're paying closer attention to. That's something that's currently probably still only in the single digits, but that seems to be ramping up significantly. And that's definitely a trend that we think also over the next 3 to 5 years will definitely play out and continue to grow from here.
RS: Yeah. And I think that that last part is also driven by regulation. And of course, that's a nice tailwind to have as well. Where I think we even had earlier in the month, we had a comment from the European Union that they want to, let's say, really accelerate this transition to electric vehicle adoption in Europe. So this can be a nice tailwind for this industry. And so that's certainly an interesting trend where we are researching more. EM: And perhaps just to talk briefly about this, analysts are talking about this trend towards a reversal of globalization, given the desire for greater national self-sufficiency and a healthier, more resilient supply chain. So this could change the global pattern of production. You, of course, look at things from the consumer side. But would such a trend affect you in your strategy?
JN: Yeah, I think it's definitely a risk. We invest mostly in global companies, so companies with a global presence. So that's definitely, globalization is, in that case, a risk. So if companies become more nationalistic or let's say more protectionism, that's definitely something that would present a risk for global acting companies, of course. And so as we've basically also already taken some action with that in mind. Also, if we look at, for instance, the exposure to China that we have; the direct exposure to China is probably the lowest it's been in a decade because we were much more cautious also given, let's say, what's happening between east and west and in Ukraine, of course. We think that that shift between east and west may probably be with us for quite some time. And so we're a bit more cautious, let's say, with regards to companies that derive a lot of their sales from countries like that.
RS: But I think also in terms of because there's a lot of talk about reshoring and bringing production closer to home, I think it's not going to be as easy as it seems on paper. I mean, for example, the semi industry, most of the semis are being produced or a lot of the manufacturing is done in, for example, a country like Taiwan. And we know all the political topics around this. But I mean, to completely bring this back to Europe or the US, it might take more than a decade, I think, for this to be complete. So on paper it sounds easier said than done, but this certainly can be a gradual process.
EM: I want to look to the outlook and possible scenarios and how you might be addressing this for your strategy. I'm just going to throw a bunch of things at you. So if we were to have a scenario of sustained policy tightening by, let's say, the ECB and the Fed, to what extent do you think this is being priced into the markets, that you really are seeing this in prices? And then what happens when growth does indeed become scarce? I mean, there's a great likelihood that that's the case. And is there then a certain point at which growth stocks then will start performing; is there a tipping point beyond which growth is so weak that you wouldn't touch growth stocks? How do you look at it?
JN: Well, at some point we need to distinguish between what's happening with the underlying companies and what's happening in the equity market. I mean, the fact that the Fed is now raising interest rates isn't going to really change how a company like Nike operates, for instance. So from a company perspective, we look mostly at the company fundamentals, how the company is doing, how it can continue to grow over the next 3 to 5 years, what trends it's exposed to. And the second thing is then the equity market, how the equity market values these companies. And so with rising interest rates, indeed, the PE multiple or the valuation multiple might be impacted by that. But I'd say from a company-fundamentals perspective, and I think that's the main driver of returns going forward, we've obviously had the PE expansion and also the PE contraction, but normally the multiples don't really change that much, let's say, as we've seen in the past couple of years. But so from a fundamental perspective, I think many of the, as we talked about, many of the trends are still intact, but also from individual companies. The future growth rates are also still looking quite attractive, let's say, in the 15 to 20% range. So that provides us with, I would say, a solid buffer should interest rates continue to increase, maybe valuation multiples will contract a little bit. But the premium growth that many of these companies are realizing should be the driver of future returns.
EM: Richard, let's complete that thought. What could trigger the decision for you to increase your exposure to some of those hardest-hit stocks, maybe the ones that aren't such ideal, perfect quality?
RS: Well, I think that our strategy has always composed of, let's say, a more defensive part and a bit more higher growth, so more the digital part. And what we certainly have seen is that the correction in the digital part has started earlier and also has been more severe in general. In some cases this can be explained for some part, because the fundamentals have deteriorated for some companies. But we certainly see more opportunities arise, left and right, that the valuation becomes actually a bit more attractive, certainly, versus those, let's say, more defensive parts. So we're in this phase right now. We're certainly are looking at opportunities there. I think it's very important that the underlying business is still very much intact and the trend that's exposed is intact. And that's, of course, what we do most of our research on. But we really feel that that balance will remain in our fund. I mean, that's always been the key driver of our fund. But of course, at the edges you can always make some differences and there certainly might arise some opportunities right now.
EM: Many of our listeners are keen to know more about investing. And so for this final chapter of this podcast discussion, let's get some insight into how you go about doing things in your working life, but also the thinking, the processes behind that. You no doubt have access to all the best broker reports and analysis. But what about the deeper thinking, you know, the in-the-shower sort of thinking; what's the best investment-related source of inspiration, whether it's a book or a podcast or a person or even a film?
JN: Well, great question. I think it's a combination. I really like what's freely available on Twitter. If you follow FitTwit, let's say the part of Twitter where a lot of the financial or people in asset management and other areas of investing are present. There's great nuggets; there's a lot of noise, but there are some great nuggets in there as well. And I really love podcasts myself, listening to podcasts often with either well-known investors or business people. So I really like to listen to those.
EM: Richard, how do you feed your thinking process?
RS: Well, I think in the past for me it was more reading books, indeed more of finance-related books or books about, let's say, successful entrepreneurs. But I think now it's certainly shifted towards the podcast as well, because it's a nice lean-back experience. You can do it in your car or in the train. And indeed I would say probably, and also if you really want to get more differentiating content, probably broker research becoming less relevant because of course that’s being read by everybody and indeed going to conventions or let's say conferences, not let's say broker related, but more industry events – that can be sometimes more insightful than, let's say, going to the regular broker conferences.
EM: Now for someone wanting to get into the investment industry, what's your advice, whether they're young or older?
RS: Well, I always, when we look for a new talent, the key word I'm looking for is somebody has to be curious. So it's a very dynamic industry where, of course, you come up with a lot of information. 80, 90% of all the information is completely useless. So you have to filter out what's the most relevant one. But I think in general, you have to be curious and not assume that everything what is said is a given. So for me, that's the most important thing, to be willing to look for new information, different angles, and not just go with the flow.
JN: And I love people with a passion. So if you have a passion for investing, then please be welcome because then it's fine to spend a lot of time on it. And it will require a lot of your time. So if you have, let's say, that dedication and you really want to spend that time, then it's definitely something that you should pursue.
EM: You've both been doing this for more than two decades. Wow.
JN: Oh no!
EM: It's impressive. It really is. It certainly doesn't look that way. So for both of you, let me ask you, what's the biggest lesson that you've learnt; life lesson or investment lesson? And I think and I wonder if perhaps you learnt that lesson in the tough times, in the times of underperformance when things are hard?
JN: Well, one of the lessons is that you seem to never learn, right? Because I've been through the Nasdaq bubble. I've been through the great financial crisis. And now, again, this correction in growth stocks. It always seems to come back, obviously, in a different way. And sometimes it feels as if you haven't learned; let's say you've been through it multiple times. And then again, there's this tough period.
EM: That sinking feeling!
RS: Yeah. And I think related to that and I think it's actually a nice add-on is at the time when you doubt yourself the most, it's very important to stick to your philosophy. That's why we have been successful in the past. And I think that’s also where we still, our key believes still haven't changed. And even though you might doubt them sometimes when let's say the markets are not working for you, please stick to your philosophy. I think that's good for yourself, but also what your clients are interested in your funds as well.
EM: Jack, the very fact that you and Richard are still here means that you indeed have learned a lot and you keep learning and you keep going. Final question. You're both parents of young children. What gives you hope for the future?
JN: Wow. Well, yeah, obviously spending time with the kids, seeing them grow up. I'll have a second one in in a couple of months’ time.
JN: Yeah. Thank you. So that's definitely something that I'm looking forward to, but that gives you a lot of inspiration also for the job.
RN: Well, I think kids are growing up in a very different environment with a lot of temptations as well, that all the technology brings to them. But it also gives them a lot of additional insights and help as well. I think I'm learning a lot from my older son, who is now nine years old, about the education system, etc.. And I think we are really going to see a lot of change there because it's very traditional still. And the way they absorb information and use information through the internet, it's a different way of looking at the world. So it gives you a different perspective for sure.
EM: Yes. Richard and Jack, thank you so much. Thanks for coming by and talking to me. And thank you to listeners for being part of this conversation. We'd love to hear from you, so please do send us your comments, feedback and suggestions to firstname.lastname@example.org. You'll find all of our podcasts on your favorite podcast platform as well as Robeco.com.
Male voice: Thanks for joining this Robeco podcast. Please tune in next time as well. Important information. This publication is intended for professional investors. The podcast was brought to you by Robeco and in the US by Robeco Institutional Asset Management US Inc, a Delaware corporation as well as an investment advisor registered with the U.S. Securities and Exchange Commission. Robeco Institutional Asset Management US is a wholly owned subsidiary of ORIX Corporation Europe N.V., a Dutch investment management firm located in Rotterdam, the Netherlands. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFS for the Netherlands Authority for the Financial Markets in Amsterdam.
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