Pandemic growth stock stars fall in bear market

High-growth tech stocks that shined in the coronavirus crisis have entered a bear market as changing consumer habits and the prospect of sharp US interest rate hikes force investors to abandon one of the most lucrative operations in recent years.

The MSCI World Growth Index, which tracks stocks with high earnings and sales growth and includes names like Amazon, Tesla and Nvidia, fell this week to a level 22 percent below its peak in November. That drop left it in a technical bear market, defined as a drop of 20 percent or more from a recent high. Aside from a brief drop in March 2020, that marks its biggest drop since the financial crisis.

April has been particularly brutal. The Growth index posted one of its worst performances in at least 20 years this month, with the tech-focused Nasdaq Composite falling 4 percent on Tuesday alone.

With US inflation running at 8.5 percent and the Federal Reserve expected to raise interest rates by more than 2.25 percentage points by the end of the year, some traders now believe that the benign conditions that underpinned a rebound of up to 250 percent in the The rate of growth over the last decade has changed forever. Some argue that the days of big profits from buying speculative stocks with an attractive growth history but little current profit may be over.

“Now people are realizing that investing is more than handing out capital like lollipops at a school party to anyone with an idea for carbon-free flying taxis or hotdogs,” said Barry Norris, chief investment officer at Argonaut Capital. who runs a hedge fund and who has been predicting a bear market in most assets.

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“Every time there has been a sell-off in the markets, there has been a central bank sell-off,” he said, comparing monetary stimulus packages to options that protect against market declines. “Central banks are not going to come to the rescue this time.”

Among the biggest casualties this year is Cathie Wood’s Ark Innovation fund, the symbol of investing in growth companies, which owns stocks such as Coinbase, Block and Spotify, and which is down 48 percent this year to 28. of April. Scottish Mortgage Trust, known for its bold bets on tech groups, is down 34 percent. Several so-called “Tiger Cub” hedge funds, spawned by Julian Robertson’s Tiger Management and often big investors in tech stocks, have also been hit hard in recent months.

A Goldman Sachs index of unprofitable technology stocks, which peaked early last year, has fallen 39 percent this year.

During a bull market that seemed endless at times, growth stocks have regularly outperformed cheap stocks, the so-called value stocks. Investors who held or bought during market pullbacks, particularly the pandemic downturn in March 2020, were amply rewarded as central banks injected stimulus, sending stocks to even higher spikes.

But the prospect of rate hikes has weighed on high-growth, low-return tech stocks because those companies’ future cash flows look relatively less attractive. Meanwhile, rampant inflation is limiting the ability of central banks to respond to crises, while fears are rising about the health of the Chinese economy.

Some investors seem reluctant to budge, despite the rapid decline in benchmark prices for US government bonds. Brian Bost, co-head of equity derivatives Americas at Barclays, said growth stocks remain popular with investors, despite the recent sell-off, and some fund managers are still balking.

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“The fact is that [growth stocks] they are still trading at very high multiples,” he said. “If something is down 50 percent, the natural psychology is that it’s really hard to sell to a loser. But I think there is more pain to come.”

Some bull market stars are now feeling the heat. Ark’s Wood, for example, wrote on Twitter this week that the rise in the US dollar “suggests that Fed policy is already too restrictive,” despite the fact that the fed funds rate is still in a target range above 0.50 percent.

Some hedge fund executives have been preparing for more difficult times. Luke Ellis, chief executive of the $151bn Man Group, told the Financial Times last month that he expected “a tough year for stocks”, while Sir Michael Hintze, founder of CQS, has been betting against stocks. unprofitable technology stocks, according to the investor’s documentation seen by the FT.

“It is a new regime for the markets. It’s going to be harder for traditional investors to make money,” said Michele Gesualdi, founder of London-based Infinity Investment Partners.

Hedge funds are adjusting to the tougher outlook. US hedge funds, for example, have net positions (the balance of bets on rising prices minus bets on falling prices) near their lowest levels in five years, according to a Morgan Stanley note for major brokerage clients.

And while some investors have used the market sell-off following the Russian invasion of Ukraine as a buying opportunity, Lansdowne Partners, one of London’s biggest hedge funds, said it was “baffled” by this reaction.

“We feel this is deeply flawed,” he wrote in an investor letter seen by the FT, adding that “the market dynamics of the last 12 years since the [global financial crisis] They have fundamentally changed.”

laurence.fletcher@ft.com

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