In a zero-interest rate, depression-filled world, growth should be highly valued. Our technology adviser Charles Elliott, whose tech fund is up +45% in 2020, defines a growth stock as one with top line revenue growth exceeding +15% in a zero-interest rate world.
People will continue to “overpay” for +15% growth because – assuming it leads to +20/25% earnings growth – it vaporises a 40x Price Earnings Ratio (PER) down to low double digits in under 5 years. So, the real question for an investor is not “is the company’s PER too high to buy it?” but rather “will the competitive position of this growth company persist for 3-5 years?”
Distributed working, 5G, growing internet diffusion, Internet of Things, augmented reality, electric or hydrogen cell vehicles, ageing populations… these sectors and themes have saved portfolios this year. Such themes are more sustainable change-drivers than either a Biden or a Trump presidency. Since we wrote about the Covid effect of “acceleration” in March, most commentators are running the same tape. “Acceleration” is the watchword.
In our June report we advised against leaving these safer “growth” shores for more cyclical and beaten down “value” sectors like cyclicals, industrials, traditional energy and, the kiss of death, hospitality or airlines. This shift and emphasis won’t last forever.
But it’s got longer to run, at least until central banks achieve their targets of 2% inflation by over-shooting it via a combination of fiscal reflation and Modern Monetary Theory.
The pace of technological innovation is accelerating. It is being driven by big data, much greater availability of computing power via the cloud, and soon 5G. Quantum computing is in its infancy but is progressing at an exponential rate. Artificial intelligence remains on a strong growth footing and benefits from the fact that you only need to teach a computer once. After that it is all copy and paste.
That process has progressed enough that we are now seeing the evolution of adaptive programming where systems learn on their own. This trend of innovation is primarily characterised by dematerialisation. The objects and services we physically engage continue to migrate to the internet. Drivers and low end legal and medical services are the next big totems of the economy to be challenged by this development.
Low interest rates and abundant credit accelerate the commercialisation of new technologies. Without 12 years of close to zero interest rates it is hard to imagine how the “sharing economy” companies could have survived for so long with needing to turn a profit.
Regulatory arbitrage has also been a significant factor in the evolution of the renewable energy sector. Selling carbon credits allowed Tesla to prosper because the system forced the company’s competitors to fund its growth. Arguably, we are about to see the same thing occur with the oil sector. Solar, wind and hydrogen projects will all benefit from mandates to reduce fossil fuel’s market share in transport and electricity generation.
The longer the process persists the more leveraged it will become. Rising interest rates are the biggest challenge to this trend. That does not look likely over the next couple of years but the sector is certainly sensitive to additional capital infusions. The prospect of additional stimulus from the ECB is probably enough to ease some of the evolving market stress.Back to top