Investment trust insider on growth stocks – James Carthew: Growth is strong but still on a Blue Planet
Back in early December, when the severity of the impact of the Omicron variant wasn’t clear, I finished my article by saying that US stocks were quite expensive, and I was nervous about a correction in 2022.
That appears to have materialised much faster than I was expecting. Without aggressive new lockdowns to fight Omicron, economies have continued to rebound, inflation continues to climb and the calls for interest rate rises have grown.
The Nasdaq is off 13.4% since the end of December and I sense that there is further to fall. Jay Powell, the chair of the Federal Reserve, has dropped heavy hints of multiple interest rate rises in 2022, with the first of these likely pencilled in for March.
All other things being equal, higher rates dent valuations of growth stocks, especially those whose profitability is expected to come in the distant future. In simple terms, valuation models based on discounted cash flows produce lower numbers when the discount rate rises.
The result has been sharp falls in funds like Scottish Mortgage (SMT) and Edinburgh Worldwide (EWI) whose net asset values (NAVs) have dropped by… read more here