👀Teasing Times: Here’s Why Growth Isn’t Growing Like It Used To And Why Value Is Suddenly So Valued

It almost seems like there’s nowhere to hide right now. With whopping inflation that has just passed 9% here in the UK (unlucky me!) along with a war in the East, a looming recession (not that that’s a surprise – but read here why it’s not as scary as you might think) bungled together with the Fed’s rate hikes and bulging debt makes for one tough investment environment. 

I’m saying this from what little experience I have – both in age, wisdom and the markets in general! I’ve only been invested in stocks since November 2020. Teeny tiny. Drop in the ocean. Though even turning back to history, this current climate seems pretty nasty, to put it mildly. 

So it really doesn’t come as a surprise then that markets have already entered the dreaded bear market territory (a fall of 20% or more) and the Nasdaq’s well past that checkpoint! Though the S&P ain’t far behind so buckle up folks.

But let’s look beneath the bonnet and see where the pain is really coming from. 

Growth in every shape and size is selling! 

Everything comes and goes and things all have their time in the sun at one point or another and then they move on. That’s life – and that’s how it works in markets. Nothing goes up all the time. Not in a linear fashion anyway! For a while, growth was all anyone could eat. Let me tell you why. 

It all started in ’08 when the US real estate market came tumbling like a house of cards. The Fed needed to act. And fast. So they lowered interest rates, turned on the money printer that showed its face in March 2020 and doesn’t seem to want to go away and began the liquidity pump. This spurred on the epic bull run that started a few years later. 

With the onset of low inflation and low rates that kept on getting lower, money started to pour into growth stocks – companies who promised more money later. Basically, a hefty pot of returns at the end of a rainbow. If you ever made it there.

Low rates increased the present value of all those lovely future cash flows which meant that their valuations were higher than they would’ve otherwise been if rates went going north. So as you can imagine, the price of growth stocks things went up. And up. And up. Like a beautiful balloon. Until the air started to slowly but surely seep out. 

Inflation is on the rise (it’s hovering ~8.5%) meanwhile interest rates are desperately trying to keep up. Look how out of breath they are! Poor guys. 50bps have gotta pull the weight outa inflation. Ain’t gonna happen. Inflation will probably remain dangerously elevated for quite some time. The Bank of England predicts it will hit 10% for us lot. Get excited! And markets have priced this in which, as you might’ve guessed, kinda rains on growth stocks’ parade. 

With rising interest rates, companies’ future earnings (when and if they come true!) will be worth much less when discounted back to today than it were say, two years ago, when rates were slashed almost nothing. Look at where the once-darlings of the Nasdaq are: Amazon, Apple and Tesla are down 35%, 41% and 21% respectively since the start of the year. Though unlucky Snapchat who managed to wipe 40% off its market cap in one day alone. Grim times lie ahead for these growth guys and investors are realising that.

It comes as no surprise then that small caps aren’t great either since these are higher growth companies and thus carry greater and so they’re more sensitive during downturns and by investor sentiment in general. 

Growth is taking a beating and it ain’t pretty.

Hello! Remember us? We’re back! 

But guess what’s been one of the very things to be in the green when literally everything is drenched in red? Yup it’s the bare necessities. From natural gas (NG) to oil to fertiliser, it’s all going up. Oh, and there’s plenty more where that came from!

Let’s look at NG and see what on earth has been going on. These prices have hit their highest level in 14 years, and NG is up 202% this year alone(!) as producers scramble to replenish their supplies to cope with soaring demand and storage levels declining. Then in Europe, we’re looking to reduce our energy dependence on Russia (consumers will be the only ones paying for it) so the US has been increasing its exports of liquefied NG to European markets. U.S. spot prices have almost tripled over the past year, spiking even higher after Russia’s invasion of Ukraine in February. 

Since hot ‘n snazzy growth stocks were once all the rage, investors (and their pots of cash) weren’t interested in all that dull stuff that gives you money now (like oil, gas, mining and so on). No way! That was so last season. So, these dull industries weren’t nearly funded as much as their steamy counterparts. New mines, investment in oil lines and whatever else is needed to get things going slowly but surely began to shrivel up. 

The green revolution needs some brown

But look what we’ve got now: the so-called green revolution. We’re supposed to be on-track to hit net zero by 2050 and we need all the dirt that we can get out hands on. EVs swallow up 4x the amount of copper as their gaz-guzzling counterparts. Meanwhile, wind turbines aren’t exactly a walk in the park! They swallow steel. Each MW of solar power needs 35-45 tonnes of steel and each new MW of wind power needs 120-180 tonnes of steel. You can see how crucial mining is.

Without these (‘hard commodities’), we’d not be able to greenify our world. They go hand-in-hand. Like the yin to the yang. And we shouldn’t dare dismiss them. Compound this with all this frankly stupid ESG greenwashing stuff that’s going on and you see an ugly picture. Oh, and this stuff got Mr Musk very annoyed! Psst: Tesla didn’t make it to the S&P 500 ESG Index. Don’t ask me why.

The blame game

Governments blamed the war in the East for the ridiculously high prices of oil and gas and we mostly fell for it. But long before that, we were faced with years and years of underinvestment. When prices are flat, or falling, suppliers aren’t motivated to raise production. It’s only when prices start to climb that they wake up and start boosting production to get a slice of the (fat) pie. But then, as we know, prices start falling again because producers have given markets too much. And when supply > demand, prices start to come down. 

The problem with this is that supply is clearly constrained. These industries have suffered from a general lack of investment so whether or not demand cools off, we’ve still got problems on the supply-side.

You could be thinking that hey, recession is almost here and that the prices of this stuff will collapse. But let oil be an example: it’s held its ground at ~$110 p/barrel despite China’s growth cooling and it operating below capacity, not to mention the fact that global growth in general is taking a breather, to put it nicely, along with record releases from US Strategic Petroleum Reserves. Impressive.

We could very well be entering the 70s-style where the value guys outperformed the growth guys. But either way, diversification remains paramount and never bet on one single outcome. Make sure you’re prepared for it all.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.