Baillie Gifford: 2022 was a 'humbling' year for growth investors

James Budden told FTAdviser growth stocks have been “ruthlessly re-rated by Mr Market”.

“Early in 2022, we saw a rare value rally as the winners of the great Covid escape were favoured with fossil fuel firms, traditional pharma and finance making a comeback,” he said.

However, then Putin invaded Ukraine, sending Europe into chaos and triggering spiralling energy costs which were then further exacerbated by supply chain issues post-Covid and the promise of monetary tightening and interest rate rises emanating from central banks. 

Budden said all of this, combined with China’s “obsessive” zero Covid approach has led to an ongoing persecution of growth stocks where share prices oscillate wildly according to news flow, whether it is “important or trivial”.

“For instance, in April Netflix’s share price fell 40 per cent on one day when it announced it had lost 200,000 subscribers out of 200mn,” he said.

The Truss trauma, its gilt crisis, and the subsequent embracing of recession by her successors will leave UK investors short of fundsJames Budden, Baillie Gifford

Company share prices have been “savagely” adjusted due to high levels of inflation, as investors are not prepared to look out beyond the near term, Budden said.

“This narrative has continued as we pass into a kind of depressing stalemate illustrated by the tragically turgid situation in the Ukraine and generally grim politics in places around the globe.”

Budden highlighted the UK as “a particularly cringing sideshow”, down to political mayhem.

“In one sense, this does not matter much to the global investor as our stock market carries relatively small weight in global indices. 

“However, the Truss trauma, its gilt crisis, and the subsequent embracing of recession by her successors will leave UK investors short of funds which affects us all in the fund management industry.”

Labour slogans

“Things can only get better,” Budden said, “But when is the question?”

Beware those who think they know the answer, he cautioned, as nobody can possibly know what is going on in the heads of Vladimir Putin and Xi Jinping.

Asian economies are not just growing in a domestic sense but also leading the world in key areasJames Budden, Baillie Gifford

The inflation issue, and when it will begin to ease, is only marginally more easy to predict.

Pundits point to a peak in the US in the foreseeable future and a subsequent pivot on interest rates, Budden said. 

“However, there seems little prospect of that sort of immediacy in Europe and the UK.”

Emerging markets appear “more exciting”, despite the uncertainty surrounding China, and the future is rosier for Asia where inflation headwinds have not been blowing as strong.

“Asian economies are not just growing in a domestic sense but also leading the world in key areas – Taiwan in chips, Indonesia in nickel, South Korea in batteries and China in solar energy. 

“Also, Japan is not unconnected with the rise of wealth in the East, and it has excellent businesses with which to exploit it and all from a comparatively low base in valuations terms.”

As long-term active growth managers, Baillie Gifford tries not to dwell on the short-term macro environment, and what really matters is companies which can grow significantly over five to 10 years.

“Our aim is to unearth the big winners of the next decade,” Budden said, adding that the company is looking to the future with optimism and excitement.

“Unless Mr Market has another trick in store for us, currently there seems to be a dislocation between the operational progress of many growth companies and their respective share prices.”

Budden mentioned Moderna, which is trading below its pre-Covid price despite revenue growing 187 per cent since 2019 and its profits growing 2,294 per cent.

“Some think Moderna is a one trick pony, yet it currently has 44 solutions trialling on its mRNA platform – the Covid vaccine was but one.”

Some may prove to be turkeysJames Budden, Baillie Gifford

Markets may be throwing out the baby with the bathwater, Budden said, and growth company valuations may currently prove to be at an attractive entry point.

“At some stage, strong corporate earnings will be rewarded in share price terms.”

Other themes which will dominate next year include the green revolution and decarbonisation affecting everything, alongside further digitisation of the economy which seems inevitable.

“Then we have the interface between data and geonomics which promises to personalise medicine which means moving emphasis from cure to prevention. 

“But for fund managers, the challenge is to find the right companies to exploit secular changes like these and hold onto them through thick and thin. 

“Some may prove to be turkeys, but the swans should suffice.”

sally.hickey@ft.com