Ample growth runway
Raj Shant, portfolio specialist at Jennison Associates
After the severe rotation into the cyclical/value part of the market in the first quarter, the market abruptly shifted back into secular growth stocks in mid-May as the Fed released meeting minutes hinting at the possibility of tapering down the road. The beneficiaries of the rotation back into secular growth were companies most impacted by the initial rotation into value/cyclical stocks. In lieu of these shifts in market leadership, investors spent much of the first half of 2021 attempting to bisect the equity landscape along themes of growth versus value and economic reopening versus remote work. However, stock price fluctuations over the past two quarters suggest this is a simplistic approach to forecasting the course of equity markets. We believe lingering ambiguity surrounding the growth outlook points to continued market volatility ahead, with a positive bias from ongoing upward earnings revisions.
Our fundamental research continues to focus on secular growth opportunities we expect will extend well beyond the pandemic. For example, the pandemic has accelerated the adoption of digital technologies by several years, and we expect many of these changes will be permanent. Companies are understanding that to remain competitive in this new environment they must value technology’s strategic importance as a critical component of business – not just as a source of cost efficiencies.
This can be seen across multiple fronts: technology-heavy capital expenditures, e-commerce strategies, the enterprise transition to the cloud, direct-to-consumer business models, and software applications that extend across businesses. We believe large, global-oriented total addressable markets provide an ample runway for long-duration top and bottom-line growth, with many disruptive trends expected to double over the next 3-5 years.
Avoid story chasing
Eric Lynch, co-manager of the OYSTER US Value Fund
Everyone has been surprised by how rapidly the economy has recovered from the pandemic. However, we believe the rate of economic recovery has now peaked, and we find ourselves mid-cycle. This is based on economic indicators, such as the ISM Purchasing Managers’ Index and other monthly readings we monitor.
US equities are at extortionate prices. According to the cyclically adjusted price-to-earnings ratio, they are the most expensive they have been since the tech boom. I believe this is the result of ‘story time in America’ – where the better the story, the better the stock. This is common in times of great economic, technological, or social change, and usually results in too much money chasing too few good investments.
We are finding the best risk-adjusted opportunities in quality companies that have the audacity of being neither the clearest beneficiaries of big secular growth nor of a reflationary post-pandemic environment. In aggregate, these ‘in-between’ high-quality portfolio businesses delivered positive earnings per share growth in 2020, and we expect them to deliver double-digit growth through the remainder of 2021 and beyond.
