The stakes are high for growth stocks as FOMC looms The stakes are high for growth stocks as FOMC looms The stakes are high for growth stocks as FOMC looms

The stakes are high for growth stocks as FOMC looms

Equities 6 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Underneath the major equity indices a bloodbath has taken place in bubble and e-commerce stocks with our bubble stocks basket down 43% from the peak in February. However, with inflation pressures more persistent and an US administration eager to ease the pain of inflation for voters, the FOMC is likely to double tapering and signaling a rate hike as early as March next year. Growth stocks have already to some extent discounted this but depending on nuances in tonight's FOMC statement the selloff in Nasdaq 100 and more generally growth stocks could continue.


Significant shift in investor appetite for growth stocks

The past month has seen a big shift in the underlying structure of the equity market which is not clear if you just watch the main equity indices such as S&P 500 and Nasdaq 100. Powell (Fed Chair) and Brainard (Fed Vice Chair) are clearly on a mission, and likely dictated by the US administration, to bring down inflation as it has proved more deep-rooted than the Fed’s models initially were indicating. The change in tone and intention have wrecked growth pockets in the equity market with our Bubble Stocks and E-commerce baskets down 11.5% and 10% respectively, and with other baskets across the green transformation and next-generation medicine themes just behind. On the flipside investors have bid up the commodity sector, defense, and logistics stocks in a sign that investors are betting that the physical world will continue its revenge against the online world into 2022.

Will the bloodbath in bubble stocks continue?

A hawkish FOMC could extend the already massive drawdown among bubble stocks that has reached -43% as of yesterday. Technically bubble stocks could correct 11% from current levels on a hawkish FOMC before finding support; there is growth after all regardless of interest rates and inflation in this pocket of the equity market. But to get an idea of the equity duration (interest rate sensitivity) read my Twitter thread from yesterday on Pinterest. Here we provide an idea of the interest rate sensitivity for such a growth stock with our cash flow model showing that a 100 basis point upward move in the US 10-year yield would mean a drop of 18% in market value for Pinterest. This an interest rate sensitivity that is more than twice that of the US 10-year bond itself and this is even for a profitable growth company. Non-profitable growth companies such as our bubble stocks have likely an equity duration around 25-30.

What can we expect tonight at the FOMC? Consensus is looking for a doubling in the pace of tapering which puts the Fed in a position to hike the rate in March and then most likely two times more hiking rates three times next year. This is the consensus, but the nuances and interpretations will also lie in the dot plot which will highlight whether FOMC members have become more hawkish looking a bit further out than 2022. The US labour market is tight and wage pressures warrant the FOMC to tighten monetary policy.

For an immediate interpretation tonight of the FOMC statement watch the US 2-year T-Note futures Mar 2022 (Saxo ticker is ZTH2). For those clients that do not have futures enabled on the trading platform can watch a delayed price on this CME website. The most sensitive reaction in equities will happen in Nasdaq 100 futures Dec 2021 (Saxo ticker is MNQZ1) as this index represents the most interest rate sensitive equity index or the major indices.

Source: CME Group
Source: Saxo Group

The tables below shows the composition of our bubble stocks and e-commerce baskets, so for investors with a large exposure to these stocks the risks are extra high going into tonight’s FOMC meeting.

Bubble stocks basket

NameMkt Cap (USD mn.)12M Fwd EPS12M Fwd EV/SalesDiff to PT (%)5yr return (%)YTD return (%)
Kuaishou Technology213,499-0.8516.261.0NANA
Sea Ltd140,384-1.2617.382.4NA12.9
Airbnb Inc130,635-1.3128.115.9NA14.4
NIO Inc94,795-1.5918.084.1NA-33.7
Snowflake Inc84,570-0.8771.513.2NA24.6
DoorDash Inc67,743-0.1917.649.4NA9.6
Roku Inc59,111-0.2623.167.8NA-33.3
Bilibili Inc51,601-4.7618.299.3NA-38.2
Teladoc Health Inc41,124-0.3020.376.5447.0-53.9
XPeng Inc37,228-2.4115.042.2NA3.8
Affirm Holdings Inc34,499-0.8939.754.4NANA
BeiGene Ltd34,490-9.7835.851.2840.37.8
Unity Software Inc34,299-0.3532.724.6NA-8.8
Plug Power Inc32,156-0.1868.161.62,214.4-9.9
Seagen Inc31,016-0.1115.931.9130.7-17.5
Cloudflare Inc28,050-0.0846.164.2NA73.7
Splunk Inc27,486-0.2110.852.597.3-35.6
MongoDB Inc25,201-0.9834.115.9NA33.3
Exact Sciences Corp24,752-1.1413.368.9434.1-42.2
Gaotu Techedu Inc24,455-3.3411.8NANANA
Farfetch Ltd23,465-0.6610.370.7NA-53.5
DraftKings Inc23,186-1.1626.5117.5NA-40.3
GDS Holdings Ltd20,998-0.1518.672.9387.2-50.2
10X Genomics Inc20,458-0.3238.946.7NA-3.7
Argenx SE19,397-10.72105.220.01,683.29.8
Alnylam Pharmaceuticals Inc19,214-4.7721.010.2318.442.9
Ping An Healthcare and Technology Co Ltd18,942-0.9111.684.9NA-68.5
Innovent Biologics Inc18,305-0.6124.067.9NA-31.0
Guardant Health Inc16,826-1.5040.575.6NA-29.0
Zai Lab Ltd15,781-2.5287.5171.6NA-53.9
Kingsoft Cloud Holdings Ltd15,710-2.569.6135.7NA-64.5
Yatsen Holding Ltd15,665-1.1710.771.2NA-88.7
Oak Street Health Inc15,461-0.4611.169.5NA-46.7
C3.ai Inc15,370-0.7969.673.2NA-77.5
Bill.com Holdings Inc15,319-0.1957.453.0NA76.7
Canopy Growth Corp15,279-0.9024.238.617.0-62.5
Appian Corp15,229-0.4043.358.4NA-58.7
Avalara Inc14,770-0.1621.349.3NA-14.2
Elastic NV14,429-0.4420.654.0NA-22.1
Wolfspeed Inc14,240-0.5921.3NANANA
Aggregate / median1,565,14121.361.3410.6-30.0

E-commerce basket

NameRegion (*)Market Cap (USD mn.)Sales growth (%)EBITDA growth (%)Diff to PT (%)
Amazon.com IncGlobal1,668,07337.632.922.1
Alibaba Group Holding LtdChina713,10435.348.123.0
MeituanChina304,56049.5#N/A-3.7
Pinduoduo IncChina237,647129.723.3-9.3
Shopify IncGlobal149,77547.0-37.4-1.9
JD.com IncChina149,44824.9518.912.8
Sea LtdSoutheast Asia124,491163.121.1-10.9
MercadoLibre IncBrazil93,10859.5-112.4-4.0
Carvana CoUnited States45,593101.5-6.5-2.3
Chewy IncUnited States42,79637.228.8-2.2
eBay IncGlobal40,009-4.93.215.2
Delivery Hero SEMENA32,81186.1-201.56.5
Zalando SEEurope29,90820.375.3-6.1
Ocado Group PLCUnited Kingdom28,7839.9-20.1-29.3
Wayfair IncUnited States28,34034.6-76.00.8
Etsy IncUnited States26,48835.640.1-2.3
Farfetch LtdGlobal22,77269.5-83.2-11.7
Vipshop Holdings LtdChina21,87110.084.6-13.1
Just Eat Takeaway.com NVEurope16,43779.0-55.133.3
HelloFresh SEEurope15,60741.4#N/A-4.2
Rakuten IncJapan14,79714.7-30.615.7
Ozon Holdings PLCRussia11,04961.5-197.40.7
Dada Nexus LtdChina10,76961.39.75.2
ZOZO IncJapan10,1976.09.8-4.6
THG PLCGlobal9,80824.5-1.620.5
Fiverr International LtdUnited States8,51741.88.9-7.0
Stitch Fix IncGlobal8,0908.5#N/A-32.3
Mercari IncJapan7,96547.6-59.43.5
ANGI Homeservices IncUnited States7,56710.7-41.3-4.3
Grubhub IncGlobal6,93738.7#N/A-10.4
ASOS PLCUnited Kingdom6,78119.4147.115.9
boohoo Group PLCUnited Kingdom6,02844.159.232.3
Jumia Technologies AGAfrica5,71524.3-31.3-49.0
Qurate Retail IncGlobal5,225-4.3-55.71.4
Shop Apotheke Europe NVGermany4,80429.9-19.4-12.6
LivePerson IncUnited States4,54816.7-716.77.9
Stamps.com IncUnited States4,319-2.6-42.259.4
Baozun IncChina3,48335.058.13.8
BHG Group ABSweden2,20944.493.317.4
Boozt ABNordic1,38923.068.96.0
Aggregate / mean3,931,81640.3-12.72.1
Source: Bloomberg and Saxo Group
* Region is the main geographical revenue segment and global if geographical segments are almost equal

The 5-year chart below on Nasdaq 100 futures is for compliance reasons.

Source: Saxo Group
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