PUBLISHED MON, APR 4 20227:54 PM EDTUPDATED TUE, APR 5 20228:20 AM EDT
Elliot Smith
@ELLIOTSMITHCNBC
Goldman Sachs Asset Management has outlined four market “megatrends” which offer a “hugely attractive entry point” for investors.
Stock markets around the world endured a volatile first quarter as the prospect of higher interest rates, soaring inflation and Russia’s invasion of Ukraine rocked global risk sentiment.
Luke Barrs, head of fundamental equity for EMEA at GSAM, told CNBC’s “Street Signs Europe” on Monday that high growth, long-term secular themes have begun to take on significant discounts as central banks around the world hike interest rates.
However, he argued that the market has “overreacted” to these concerns and that portions of the market centered on innovation are now oversold.
Barrs highlighted that since November, when central banks began adopting a more hawkish tone in the face of rising inflation, top line growth across technology, environmental and biotech companies has been “very healthy,” but valuations have continued to decline despite strong fundamentals.
In particular, GSAM is looking at four critical “megatrends” in determining where to allocate investments for the coming years. These include technological advancement and disruption, a “new age” of consumer willing to spend money on different things and in different ways, the future of healthcare (such as genomics and precision medicine solutions), and environmental stocks.
“Right now, as we look across that landscape, some of those digital technologies, some of those online stories where the year-on-year [comparisons] have been fairly challenging, the discounting mechanism is very aggressive, but actually the fundamentals look very healthy,” Barrs said.
“If we look at the e-commerce space or the digital payments space for example, we’re talking about businesses that have seen a 40 or 50% decline in valuations despite the fact that forward-looking growth is still somewhere in the mid-20s for this year and over the next three to five years.”
Barrs added that for businesses that are typically “asset-light” and have high cash conversion ratios, such as tech stocks, the rising interest rates will have a negative impact on profitability, but “nowhere near as significant as the market has priced in over the last few months.”
The rate rises will also not have a bearing on cost input for these businesses in the same way that it would for a more labor-intensive or capital-intensive type of industry, Barrs contended, suggesting that current low valuations in digital tech stocks offer a “hugely attractive entry point” for investors.
De-globalization
The prospect of de-globalization in the world economy picked up steam several years ago as the U.S. and China traded sanctions and trade tariffs, and Barrs suggested this theme was further entrenched through the Covid-19 pandemic and the sensitivity of internationally dependent supply chains it highlighted.
‘We’re now in an era of de-globalization,’ as companies rethink supply chains, says Eddie Perkin.
Talk of de-globalization has resurfaced in recent weeks as Western powers attempt to cut Russia adrift from the global economy. As governments and companies move to onshore more of their supply chains to minimize future disruption, Barrs said semiconductor manufacturers were well placed to capitalize.
“Semiconductors, especially the leading edge of semiconductor manufacture, is going to be a foundational technology for all of the major tech themes we see over the next couple of decades,” he said, adding that the trailing position of the U.S. compared to Europe and Asia in the field means around $40-50 billion will need to be spent over the next two decades to become competitive.