The global credit crisis has led not only to the first worldwide recession since the 1930s, but also left an enormous burden of debt that now weighs on the prospects for recovery. Today, government and business leaders are facing the twin questions of how to prevent similar crises in the future and how to guide their economies through the looming and lengthy process of debt reduction, or deleveraging. In my previous article, "Ray Dalio's Primer On Deleveraging," I wrote about the deleveraging cycle based on Ray Dalio's seminal work, An In-Depth Look at Deleveragings on the subject. Though US (SPX) is undergoing a beautiful deleveraging balancing the options available, investors have found it hard to generate positive returns in this volatile market.
Moreover, with the great deleveraging exercise expected to prolong for the next 6-8 years, it would exert pressure on the equity market valuations. In this market environment, we zero in on two characteristics that would help pick the winners.
- "Earnings growth" - key return driver (Preference for growth over value stocks)
- Secular or stronger structural earnings growth potential and predictability: (Derived from enduring trends like demographic or technological change)
On an historical basis, growth stocks have tended to outperform value stocks when economic and profit growth is slowing. This has been true as well since the beginning of the deleveraging cycle in 2007. Companies with strong secular growth profile will benefit in the context of scarce earnings growth from their more resilient and less volatile earnings.
Moore's law defines growth opportunity. This sector has historically been growth area because technology companies are driven by both Moore's Law and human creativity. While history suggests that the most innovative companies of one generation will eventually be replaced by the next "new thing," industry-wide growth should remain robust as faster, cheaper and more powerful building blocks spark innovation and growth. In the context of slower economic growth and more frequent credit market "scares" caused by deleveraging, technology companies have two attractive characteristic -
- technology used as a tool to combat sluggish revenue growth by enhancing productivity and cost savings
- Tech companies' strong, fortress-like balance sheets, reducing reliance on external capital to fund growth.
(Outperform, TP $35)
(Outperform, TP $50)
NXP Semi (NXPI)
(Outperform, TP $33)
(Outperform, TP $22.5)
(Outperform, TP $64)
ASML Holding (ASML)
Outperform, TP €€42)
(Outperform, TP $62)