June 30, 2022
Global markets have entered a difficult period as fundamentals turn and inflation has emerged, somewhat more strongly than expected. As global economies faced a myriad of difficulties over the past couple of years, governments responded by supporting their economies through these crises with large amounts of debt. That, in turn, has meant the equilibrium level of interest rates has continued to get lower and lower.
While higher inflation is now driving interest rates back up, it is unlikely they are headed back to where they were previously; ultimately, we are still living in a low-rate world. Highly indebted governments and consumers cannot afford rates to reach levels much above three percent.
If rates do get too high, the risk is that economies will be pushed into recession and, as we are starting to witness, inflationary (and rate) fears are having a negative impact on equity markets.
All of this means it is a tough time for growth managers; in fact, growth equities have been under pressure for some time, with many of the problems in global equity markets apparent as early as March last year.
Like any trend, investment styles come in and out of favour. While growth stocks are likely to fall out of favour in the current environment, it’s worth revisiting what sets them apart.
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