By George Russell, Institutional Portfolio Manager, Franklin Equity Group
The first few years of the 2020s have been challenging, to say the least.
Just as optimism was building that the worst days of the pandemic may be behind us, war in Eastern Europe erupts. Hopefully the conflict in Ukraine can find some sort of resolution sooner rather than later, but it’s a worrying time for sure.
Amid the geopolitical turmoil, markets have experienced some wild swings so far in 2022. The conflict in Ukraine has created extra uncertainty for investors who were already concerned about runaway inflation levels, and what higher interest rates may mean for their portfolios. The Bank of Canada has announced its first hike since 2018, and the expectation is that more increases are to follow throughout 2022.
In this tumultuous environment, Growth stocks have had a difficult time. While the first year of the pandemic largely benefited Growth names, particularly in the tech space, there has been a reversal of fortunes in recent months. As inflation concerns increased hawkish sentiment among central banks, a Growth to Value rotation occurred across markets. The question many investors are now asking is just how much the U.S. Federal Reserve or Bank of Canada will ultimately raise rates.
This decision will be contingent on whether inflation continues at such a rapid rate, which won’t be helped by higher energy prices arising from the war in Ukraine.
Permanent or Temporary Change?
U.S. consumer prices were up 7% year-over-year at the end of 2021, a 40-year high, while Canada’s 4.8% annual inflation at the end of the year marked a 30-year high. In his recent paper on the subject, Franklin Innovation Fund portfolio manager Matt Moberg identified two main themes that will dictate market performance this year: which companies have experienced permanent change due to the pandemic, and the duration and magnitude of inflation.
What’s crucial is identifying companies with strong fundamentals that can weather market downturns and emerge on the other side stronger than before. The Franklin Innovation team also believes the economy is at or near peak inflation, and as price rises decelerate, investors may begin to look more favorably towards Growth stocks again.
Platforms for Growth
Central to the construction of Franklin Innovation Fund are the five platforms for growth: global e-commerce; genomic breakthroughs; intelligent machines; new finance; and exponential data. These themes are long-term trends that are having a huge impact on the global economy, and some have been particularly pronounced during the pandemic.
The shift towards online shopping is one such example, and greatly benefited companies such as Amazon and Mercado Libre as consumers embraced online shopping. Gene sequencing is another area with significant growth potential as the industry is still very much its formative stages. With the cost of gene sequencing coming down markedly in recent years, there are a host of new opportunities for this segment of the Health Care space, including the response to COVID-19. The use of robotics and intelligent machines is another game changer in Health Care, as it is in the Industrial sector, as well as across society with the rise of autonomous vehicles.
The growth prospects for intelligent machines have accelerated recently, as a labour shortage has increased the need for automation. Changes in new finance are already well established and will continue to gather pace in the years to come, while the potential for exponential data and its uses in areas like augmented reality (AR), virtual reality (VR), cloud computing, and the metaverse is massive.
These platforms for growth will continue to create investment opportunities through market downturns, pandemics and even wars. In that regard, hopefully the rest of this decade isn’t characterized by major global crises, and the innovation that’s ongoing can really make a difference for creating a more happy, prosperous and peaceful world.
George Russell has been an institutional portfolio manager with Franklin Equity Group since 2010. As a member of the U.S. Growth Equity Team, his primary responsibility is to represent the team and communicate the investment philosophy, process and current strategy to domestic and international clients, as well as external gatekeepers and decision makers.
This commentary is for informational purposes only and reflects the analysis and opinions of Franklin Equity Group as of March 3, 2022. Because market and economic conditions are subject to rapid change, the analysis and opinions provided may change without notice. The commentary does not provide a complete analysis of every material fact regarding any country, market, industry or security. An assessment of a particular country, market, security, investment or strategy is not intended as an investment recommendation nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. Franklin Equity Group, part of Franklin Templeton Investments Corp.