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Hyperion looks to slower growth for a helping hand

Lewis Jackson  |  26 May 2022Text size  Decrease  Increase  |  
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Australia’s largest growth manager is betting on a counterintuitive outcome to revive a torrid run of performance: an economic downturn and anemic growth.

Nursing a 36% year-to-date loss at Hyperion’s bronze-rated Global Growth Companies, chief investment officer Mark Arnold blames soaring bond yields, which he expects to soon retreat as the economy cools. Short-term interest rates should peak this year in the US as waning government stimulus, a looming recession in Europe, lockdowns in China and elevated energy prices squeeze inflation and growth.

“We believe high inflation and high interest rates are temporary,” says Arnold, at a webinar with advisors and investors on Tuesday afternoon. “If we’re right, then the stock price decline that our portfolios experienced in recent times will enjoy a reversal as inflation and bond yields start to decline.”

Technology and other growth stocks are tumbling as blowback from the biggest bond market selloff in decades ripples through equity markets. Long-term US government bond yields, a proxy for long-term interest rates and fundamental to equity valuations, are up 82% this year as investors recoil from rising inflation and higher rates. Growth stocks are sensitive to interest rate changes because of the long duration of earnings. When rates are low, investors value future profits more because the rate used to discount those profits is low. Rising rates tend to curb that appetite.

The technology heavy Nasdaq Composite is down 28% this year, while the local S&P/ASX 200 technology index has shed 34%.

Hyperion argues its stable of disruptive plays like Tesla (TSLA) and Block (SQ) will outperform in a cooler economy. Slowing growth will stall momentum at the banks and energy companies currently atop equity league tables. As value stocks coasting the economic boom fade, markets will again prize companies promising double-digit earnings growth, so the argument goes.

“A scarcity of growth environment is more favourable to our style of investing,” says Arnold. “In this environment, capital allocators would be forced to buy our stocks and sell low duration low quality cyclical stocks to get exposure to earnings growth.”

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Silver-rated Hyperion Australian Growth Companies clocked a 20% decline as of 30 April, according to Morningstar data.

Growth stock tailwind to return

Arnold downplayed worries about the spectre of 1970s style inflation today, arguing the low growth, low inflation world of the 2010s is far more likely to reappear.

Weaker unions will struggle to bid up wages and trigger the price spirals that characterised the 1970s and 1980s, he says. Record debt levels, technological innovation driving down product prices and “poor demographics are a recipe for falling, not rising, prices.

“Our low growth, low inflation, low interest rate framework still looks to be most likely outcome over the long term,” says Arnold, pointing out how bond markets are already pricing in a decelerating in inflation and growth.

Government bond yields in the US and Australia have retreated in the second half of May as a raft of fresh data points to slowing growth in economic engine rooms like China, the US and Europe.

To be sure, others argue the world is on the cusp of a new era of permanently higher inflation and interest rates—a combination that would leave bond yields high and add a permanent discount to growth stocks. Aging populations will leave fewer people working, lifting wages and prices, according to a hotly debated 2020 book from economists Charles Goodhart and Manoj Pradhan.

Arnold remains sanguine about Hyperion’s portfolio in the event Messrs Goodhard and Pradhan prove right. Double-digit earnings growth, low debt, and free cash flow will ultimately trump macroeconomic considerations, he says.

Portfolio changes amid the volatility

Hyperion’s deputy chief investment officer Jason Orthman highlighted a series of portfolio reshuffles as the fund doubles down on big technology bets.

The fund modestly expanded its stakes in top holdings Tesla and Amazon.com (AMZN) between January and April. Both companies make up roughly a quarter of the portfolio and are down 45% and 37%, respectively this year.

Orthman doubled down on Australian Growth Companies fund holdings such as Fisher and Paykel, Dominoes and Xero, the fund’s largest position according to Morningstar data.

“If you change your lens from multi weeks or multi months to multi years, we think all those businesses will do really well,” he says.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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