The Case For Growth In 2023

Hatem Dhiab
Managing Partner, CFP®
01.31.23

The Case For Growth In 2023

In 2022, growth stocks faced a reckoning due to the FED raising interest rates to tame stubbornly high inflation, which was exacerbated by global supply chain issues after Covid lockdowns and a war between Russia and Ukraine that created an energy and humanitarian crisis not seen in Europe since WWII. Chaos in the global market ensued with the tech-heavy Nasdaq ending the year at minus 33% for the year while S&P was down 19% and the boring Barclays agg or bond index also suffering one of its worst years ever with a negative 13%.

So after dislocations like these and one of the worst years for markets since the Great Financial Crisis of 2008, I thought I would review why we should keep investing in growth.

There is a place for growth stocks in a well-balanced portfolio, the fact that their performance has been challenged this past year shouldn’t be a detractor. The old adage of buying low rings is even truer here. Despite a dismal showing in 2022, the long-term track record of growth has been quite strong (past performance is not indicative of future results). One of the most important factors is risk tolerance and the time frame that investors have. Younger investors or ones with a longer time frame can usually tolerate these fluctuations and should look at these periods as opportunities.

The reality is that while some repricing of growth stocks was justified, such as in cases of inflated earnings due to COVID-19 or businesses without a path to profitability, there was also indiscriminate selling that has created opportunities for the right investor.

How do we deal with the volatility and sell-offs?

During periods of high volatility or drawdowns, we try to be more selective on what and how many companies to buy. At GK, we look to add to our highest conviction ideas while also searching for new opportunities, such as companies that have been disproportionately impacted by market movements. This allows us to stay disciplined through challenging market conditions while managing and making informed decisions about our portfolios and investment allocations.

What’s attractive right now?

There are several areas of growth that we believe are particularly promising at present. These include companies that have been significantly discounted but have the potential to achieve their long-term growth goals. The significant repricing of these stocks has provided us with a larger margin of safety, even if markets experience further declines.
We are also thematic in our approach, which means that we like sectors that are likely to benefit from larger secular trends. Think electrification of the grid, global warming, electric vehicles and early cancer detection. These are all areas that provide some of the most exciting opportunities for innovation and will likely become the leaders of the future.

Innovation, which is at the core of growth stocks, is not slowing down. The trends of digitization, e-commerce, and artificial intelligence are all ongoing, and we believe that the challenges facing companies today will only drive more innovation. A tight labor market and increasing costs for inputs will encourage companies to seek out industrial and technological improvements and efficiencies. These developments will benefit companies that are meeting the needs and demands of the future.

As active investors and asset allocators, we believe that it is an exciting time to invest. America is full of high-quality companies that are thriving. There are also many smaller niche market leaders and up-and-coming companies with unique products and solutions that we believe can become future leaders. Our job is to continue to find, invest and support those who are shaping the future.