SUMMARY
We believe that less cyclically sensitive growth equities could outperform amid the current market environment. Artificial intelligence is one area where we see potential.
- Growth shares have been rising recently, ignoring the collapse of three banking institutions last month. While both cash-generating and money-losing tech have rebounded in this period, the bounce in profitless firms has been unconvincing. There’s been poor market breadth within the Nasdaq index, as the very largest, well capitalized firms drive much of the US equity gains in 2023 to date.
- In our view, less cyclical growth sectors are better positioned for continued outperformance in the current market backdrop. In a still tightening credit environment, firms whose profits can self-fund their growth is critical.
- Within non-cyclicals, we prefer software firms which tend to deliver more stable profits, as well as firms tied to government subsidies and spending like electric-vehicle-battery producers and semiconductor equipment firms. We think these “defensive growth shares” will benefit from falling rates, and their profits won’t be as impacted by a shallow recession.
- We do believe that with a higher level of discipline, growth investing will become one of the ways to potentially generate above-average returns in the next business cycle. Three factors shape our framework for identifying compelling high-growth opportunities: thinking thematically (to the next generation of technological advancement); putting a premium on companies that can self-finance future growth; and focusing on both growth and valuation when seeking high risk-adjusted returns (so-called Growth at a Reasonable Price, or GARP, investing).
- We also apply our investment growth investment philosophy to the theme of artificial intelligence, a breakthrough technology set to have profound impacts on the world. Companies that can provide computing power and infrastructure to accommodate growth in AI are opportunities for investment, while regulation and data concerns are key risks to watch in this space.
