29 Jul 10 Top Growth Stocks for a Low-Growth World
Great times for growth investors
According to Munro Partners’ Chief Investment Officer Nick Griffin, a prolonging of the current trade impasse looks likely to extend the status quo of sub-par economic growth and record low interest rates for the medium term.
The key risk in this outlook is that sub-par growth actually turns into negative growth as policy missteps continue to escalate. However, missteps aside, Griffin argues that this environment actually favours growth equities.
“Low interest rates mean investors are attracted to, and eventually are prepared to pay more for, scarce growth assets in what has become a low-growth world,” he says.
The Munro Global Growth Fund seeks to find these scarce growth assets by identifying some of the key structural changes in the world today and the resulting investment beneficiaries.
“Regardless of the prevailing market noise the key is to look for strong fundamentals in investments to drive returns in the months and years ahead.”
When it comes to Munro Partners’ investment process, they first check the investment environment. And the interest rate environment is being fairly kind to the growth investor at present.
“We’ve actually had this environment now for most of my investing career and it’s pretty good, because generally what we’re investing in are assets that can grow much faster than the economy and that can give returns much better than the economy. So, the discount rate is very important in that discussion,” he says.
“And when we look at the discount rate today … right now it looks pretty benign for us. So, from that point of view a lower discount rate will attract people to growth equities. It just will. It has for the last 10 years, and at the moment it feels like that’s still the case.”
Griffin was also quick to note that equities in general – not just growth stocks – are currently giving investors a positive carry versus the risk-free rate, given the risk-free rate is just so low and is heading lower.
“So, from that point of view, while we understand there’s a lot of volatility out there, and we worry that people are ‘pushing on a string’ … the reality is that the rules of the game as they sit today don’t look that bad for investing in growth equities,” he says.
“In fact, they look as good as they’ve looked for a little while.”
Look for S-curves, don’t end up in the S-bend
Griffin also reminds investors that equities are a different asset class to bonds or foreign exchange, it is asymmetrically in their favour to invest in individual stocks: “We live in a world where stocks can go up thousands of percent, yet they can only fall by one hundred.”
However, the problem is that more fall by 100% than go up by 1000%. Equities is a game with very few winners and lots of losers.
But as a growth investor, Griffin keeps a watchful eye out for something called ‘S-curves,’ and there is no better example of this phenomenon being the trajectory of Apple’s domination of the smartphone market, which went from a 10% share of the overall mobile phone market to a 75% share in the space of six years. During this period, Apple stock increased 7 times in value.
“Along the way it sent a whole bunch of other companies out of the mobile phone business – Nokia, Ericsson, BlackBerry et cetera. That’s what we’re looking for when we invest in growth equities, those S-curves that we’re trying to attract because that will give us extra growth in an environment where there’s not a lot of growth, and we’ll get that return for our clients,” Griffin says.
There are several areas where Griffin is seeing strong structural growth and where he is looking to find the next S-curves. These sectors include digital payments, TV streaming, ecommerce and software as a service (SaaS).
Griffin says that for Munro Partners, SaaS or cloud computing is without doubt the most significant structural change that is occurring in the world today and by far the biggest bent in their portfolio.
“I don’t know where the economy is going in the next 10 years. I don’t know where interest rates are going in the next 10 years. I know that cloud computing is going from a 10% share of all enterprise computing, to around a 40 to a 50% share – that is going to happen in the same way that smartphones were going to be adopted,” Griffin explains.
“My job is to find the right investments here. And so, from that point of view, we’re very focused on cloud infrastructure names like Amazon and Microsoft, and SaaS companies like Salesforce.com, Adobe et cetera.
“Those will be the big winners. These will be the next big internet companies and that’s where we are positioned because it’s right at the start of the S-curve adoption.”
Leaving on a jet plane
Away from the technology names, Griffin also believes that aerospace is another area where there is room for significant structural growth, especially given that only 20% of the global population has ever boarded an aircraft.
Medical equipment is another area of interest to Griffin, in addition to luxury goods and 5G telecommunications.
Overall, Griffin breaks down these areas of interest within the Munro Partners portfolio (as at end June 2019) into 10 categories, while also naming some indicative investments in the portfolio.
“These are areas where we see strong structural growth in the years ahead,” Griffin says.
“And if we’ve got these right, and we observe our risk controls along the way, then we’re a reasonably good chance of getting clients the return for the risk they’re taking by investing with us in this low-growth world.”