Investing for Growth in a Decelerating World Economy

With the world facing inflationary and geopolitical hurdles, economic growth is poised to slow. In this environment, investors in growth stocks must identify companies with the right features to overcome headwinds to earnings.

Equity markets are coping with multiple challenges. Russia’s invasion of Ukraine has added oil to the inflationary fire and most central banks are tightening monetary policy to quench the flames. Given the fragility of the post-pandemic world economy, fears are mounting that efforts to combat inflation could lead to a GDP growth slowdown, stagflation or worse.

Shares in many sectors have been hit hard. Yet our research indicates that in some cases, sharp declines have dramatically exceeded the change in consensus earnings estimates. For example, the MSCI World Information Technology Index fell by 21.3%, while earnings estimate revisions for the sector advanced by 3.5%, representing a –24.8% difference between the two (Display). In the consumer-discretionary sector, the delta was –19.6%.

But aren’t valuations in growthy sectors still high? We agree that sectors such as technology and consumer discretionary aren’t especially cheap at 23.4x and 20.4x price/forward earnings, respectively, at the end of April. And rising interest rates will pressure multiples of higher-growth stocks. However, the gulf between share declines and earnings estimates suggests that select companies have been unfairly punished in the recent volatility. To find those with solid earnings prospects and attractive valuations, here’s what active investors should look for.

Find Companies with Their Own Growth Drivers

Investors can’t depend on cyclical growth these days. And China’s role as a driver of global economic growth is in being challenged amid COVID-19-related shutdowns. But some business trends are more resilient to a slowdown, especially those that benefit from long-term secular growth trends with long runways.