June was a painful month for growth investors, with stockmarket interest focusing on perceived beneficiaries of inflation. Many growth companies delivered good results but their shares were de-rated, often indiscriminately in the face of good updates. Attention focused on Bank of England action, and weak economic data. However, while labour unrest highlights the risk of embedding inflation in wages, there are signs of unwinding of inflation pressures in key metals and energy prices. Companies are resolving supply chain problems, and improving resilience. The key to growth businesses that will emerge from these challenges is cash generation and sound funding. The stockmarket is punishing businesses that now need to raise cash, but portfolios based on cashflow analysis should be better placed.
A feature of investing this year is relatively low stockmarket turnover during the rotation from growth to value. This may not be a sign of complacency or illiquidity, as much as a maturity in investors recognising that rebounds can be rapid, and markets often run too far with a trend. There are also risks in some perceived “value” areas, not least from government intervention or cost inflation. Many businesses that are currently enjoying excess profitability due to commodity and energy price squeezes, may be hit by new taxes. The Government has a wide range of potential intervention measures that could force companies in the headlines to absorb more inflation impact themselves. For businesses to be truly able to control their own destiny, they are better placed being lower profile or mid cap. Investors want profitable businesses, but super-normal profits that catch the eye of politicians are a risk. Mid cap B2B services may be much better protected in terms of passing on inflation.
Even in downturns there remain growth sectors in the economy and business with innovative services. The need for resilience, shorter supply chains, digital transformation and software automation, is driving growth in businesses with those specialist services. Labour market tightness works in favour of some business-to-business services that improve efficiency, as well as those that can help to manage talent and retain it. The late 1970s shared similar characteristics with the current pattern of inflation, cost of living squeeze and strikes, yet by 1980 there was a rapid return to a stable growth environment. Growth investing has earned its place in the style mix over many decades.