Growth stocks will be challenged in 2022 Growth stocks will be challenged in 2022 Growth stocks will be challenged in 2022

Growth stocks will be challenged in 2022

Peter Garnry

Head of Saxo Strats

Summary:  Looking ahead to the new year, we have asked the Saxo Strats what they will be looking at in the new year. In this article, our Head of Equity Strategy, Peter Garnry, takes a look at equities and specifically how growth stocks might be challenged in 2022.


In 2021, Investors were twice reminded that higher interest rates for equities that are priced on rather aggressive implied growth rates can plummet. But both times equities have come back, supported by strong earnings growth this year, as the economy came roaring back from the abyss in 2020.

In the past couple of months, we have seen multiple examples of growth stocks tumbling on earnings releases, due to what has generally been seen as a response to narrowly missing revenue growth figures. But in our opinion, this is actually not the right reason growth stocks have been sent on a downwards trajectory. Rather, it is the lack of improvement in operating margins that’s the culprit – and that is going to be a major theme within growth stocks in 2022.

One figure to put attention to connected to this is equity duration, which essentially is an expression of how sensitive a given equity is to increases in another financial figure, otherwise referred to as the discount rate – in this case the US 10-year yield. Many fast-growing growth companies have an equity duration of around 15-20, and some fast growing, but not profitable, companies may have equity duration of around 25-30, meaning that they in theory see their shareholder value go down by 15-20% or 25-30% if the US 10-year yield goes up by 100 basis points – or 1%.

The only way to offset that impact is by either improving the money earned by a company, i.e. revenue growth, or the amount of money you earn per dollar you spend, i.e. operating margin. The former is difficult when growth is already high and fiscal headwinds are likely to play a role next year, lowering the growth momentum. On the positive side, China is beginning to stimulate its economy, which could push growth in the right direction.

Still, the more likely scenario is that increasing growth in companies that already experience high growth in the current macro environment will struggle to improve revenue growth. That leaves the operating margin at the core of offsetting higher interest rates next year, should the bond market finally close the gap with inflation expectations. But improving operating margins might be difficult with wage pressures at unprecedented levels not seen since the 1970s and rising input costs from commodities and electricity.

The combination of potentially higher interest rates and difficulties improving operating margin from already high levels for many companies might prove too difficult or even impossible. That is likely the reason investors are reducing their exposure to growth companies and instead search for safe havens in mega caps as these companies have a better chance of preserving, or even increasing, their operating margin. Microsoft is a recent example, showing its market power signaling a steep increase in its price on some of its software.

We continue to recommend investors to reduce growth exposure and balance the portfolios with companies in the themes such as cyber security, logistics, semiconductor, agriculture, energy, financials, mega caps, and India. Overall, next year will prove difficult for equity investors with more volatility, less direction, and the battle between interest rates and profitability.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.