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The Storm Before the Calm

24 January 2023

By Bob Huxford

Growth stocks had a rough 2022 and while investors are still being battered by a storm that's persisted for over a year it can be hard to imagine clearer skies ahead.  

Reports are that there is more pain to come. UK interest rates were at 10.7% at year end and further interest rate hikes will be needed to bring the situation under control. High interest rates reduce borrowing, which reduces spending, which puts a brake on growth, and oddly enough growth stocks don't do as well when the brakes are put on growth. 

To add to the woes, recession is now expected with a Bloomberg report finding economists see a 70% chance of a global recession in the coming year. Although it is expected to be relatively mild, the UK is expected to experience a deeper and more damaging downturn than the rest of the G7. Nobody can predict how long the recession may last, but the Bank of England thinks it could be a long one with the recovery not starting until the second half of 2024.

There are also several existential risks that remain that could bring further pain.  The Ukraine war could escalate, global supply chains could further deteriorate as a result of China's ill-advised covid policy, China may raise the stakes with Taiwan. In addition, the UK is facing a downturn in house prices with predictions ranging from 5% at the lower end to 15% at the higher, as predicted by Nomura earlier this week, which may leave some in negative equity. Meanwhile, British real wages are expected to fall back to 2006 levels with France overtaking the UK as the fourth best-paid workers in the G7.

But there are potential upsides as well - the situation in Ukraine could resolve, bringing with it a reduction in food and energy prices and an associated fall in interest rates, and global supply chains are beginning to show some signs of easing. In the UK, according to a recent PWC report, 300,00 workers are expected to re-enter the workforce this year, while new immigrants will contribute £19bn to the UK economy.

Also, one thing we do know is that markets run ahead of the rest of events in the real world. Stock prices are based on future expectations, not what's happening now, and markets tend to reach their nadir six months before a recession ends.

As the first glimmers of hope start to appear, markets will begin to rebound from levels in which too much downside will have already been priced in during the extended period of doom and gloom. It's typically these periods, following a recession, that are the most rewarding for investors.

It could be argued a lot of downside has been priced in for growth companies already. In the UK the AIM All Share index fell 32% during 2022 and, despite a small rebound at the start of 2023, is still down 35% from the high it reached in September 2021.  It’s also worth noting that the AIM All Share very rarely falls two years in a row.

We're of course not out of the woods yet but savvy investors begin building stakes in markets and companies when times are tough, not after. If positions are built gradually in falling markets, averaging down in price as the market drops, tidy profits can be made if the full position is held as the market rebounds back to its high point and beyond - because markets always do hit new highs eventually. 

Investing is a long-term game and those that do well have the resolve to buy in when markets are falling. You can never judge the bottom perfectly, and you shouldn't try, but you can make sure you're there when things turn around. If you miss the boat, you might never climb aboard, always regretting not buying when the price was cheaper while waiting for another fall that never materialises, watching from the quayside as the party goers aboard disappear over the horizon.

Essentially, growth stocks will see growth again, potentially sooner than you might think, and if you want to really make hay while the sun shines you have to get out in the cold and rain first and start putting your money to work. Then when the sun breaks through you’ll get the rainbow, and at the end of that the pot of gold.