Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 456

Where to find the opportunities of the future

Global markets have entered a difficult period as fundamentals turn and the spectre of inflation remains on the horizon. As global economies faced myriad difficulties over the past couple of years, governments responded by supporting their economies through various crises with large amounts of debt. That, in turn, has meant the equilibrium level of interest rates has continued to get lower and lower.

But while higher inflation is now driving interest rates back up, it is unlikely they are headed back to where they were previously and ultimately, we are still living in a low-rate world.

Highly indebted governments (and consumers) can not afford rates to reach levels much above 3%. If they do get too high, the risk is that economies will be pushed into recession again.

All of this means it is a tough time for growth managers, and growth equities have been under pressure for some time. In fact, many of the problems in global equity markets were apparent as early as March of last year.

Investors need to remember that in any market environment, earnings growth drives stock prices. It's not an equity market. It's a market of stocks. So those companies producing great earnings growth can continue to do so through any cycle. It may not happen in a straight line, but it will happen.

Identifying big technological and structural changes in society are a key component in recognising opportunities. One of these areas that we are focused on is High Performance Computing. But more about that later.

Market outlook

First let’s assess the current market outlook. As outlined above, we still believe the big picture is a low-rate world continuing to underpin high asset prices in the medium to long term.

In the short term, inflation is causing interest rates to go up. And expectations around interest rates have changed rapidly in the last 12 months alone. In March 2021, the US Federal Reserve was forecasting no rate hikes for the next three years. By December, estimates had increased to three rate hikes, rising to seven by March, with latest estimates at close to 10.

A simple way to think about markets is that if you take the earnings yield of the S&P 500 and subtract the US 10-year bond yield, you need to get a carry, or positive return, for taking the risk of owning equities, in the same way you expect a carry for the risk of owning a house or for owning high yield credit.

That carry has remained roughly the same at 3% for a long period. Markets might have gone up a lot, but interest rates have gone down a lot too, which means the market has not gotten more expensive for a number of decades.

We're now seeing that equity risk premium move below 300 basis points for the first time in a long while and that is creating volatility in equity markets. Fortunately, as long as you assume that interest rates won't get much above 3% in the long term, that equation will work itself out over time.

The above chart shows the different movements in S&P 500 earnings per share (EPS) growth, price-to-earnings (P/E) multiples and index growth over the past three decades. There are varying periods of P/E multiple expansion/contraction, EPS positive or negative growth and market movements.

We believe the most likely scenario for the year ahead is P/E multiple contraction and EPS growth. That is slower EPS growth this year and P/E contraction, and potentially reduced growth next year with more P/E contraction.

However, the worst-case scenario outcome – of P/E contraction and negative EPS growth – would require a large proportion of big US companies to simultaneously experience earnings contraction, something that is highly unlikely.

Area of interest – the fourth era of computing

Investors invest in equities – not economies – and equities are driven by structural earnings growth, and this is why we like to identify key areas of Interest and structural change.

Semiconductors are one such area. Semiconductors have gone from a zero per cent market, or zero per cent business, nearly four decades ago, to half a trillion US dollars today. Semiconductors now are on their way to becoming a $US1 trillion business as we head into the fourth era of computing, or the artificial intelligence (AI) era of computing.

As every single device in the world becomes connected to the internet - your fridge, your garage, your security system, your airport parking, etc – a multitude of data is going to go up into the cloud. Once there, it needs to be processed at incredibly fast speeds with AI in order to create predictive outcomes. This is already happening to some extent with, for example, streaming service recommendations.

But all this high-speed data processing is going to require more GPUs or graphic processing units to create accelerated computing. We are forecasting that the server market has the potential to grow from roughly $US25 billion per annum today to nearly $US250 billion, or by a multiple of 10, by 2035.

There are only three or four companies worldwide that are in this highly focussed world of high-performance computer architecture and one of our favourites is semiconductor company AMD (Advanced Micro Devices). As a growth stock, it’s obviously not currently popular, but it’s going to get very exciting very soon.

Source: Bloomberg Finance L.P 1 April 2022

As indicated in the above chart, AMD’s earnings growth has grown structurally over time and will continue to grow as more and more companies invest in this product. Not so long ago you had to pay 30 times earnings for AMD, but you can now buy it at 18 times earnings, even though it’s growing its earnings at 35% this year. We forecast it will grow its earnings at 30% next year as well as it really is one of the great growth opportunities of the future.

Final word

There is no doubt it’s a tough time to be investing in growth stocks but by continuing to identify the structural areas of interest, such as accelerated computing outlined above, growth fund managers and investors can take advantage of lower prices and be well positioned when the market and interest rates do return to some level of normality.


Nick Griffin is Chief Investment Officer at Munro Partners. Munro is a specialist investment manager partner of GSFM Funds Management, a sponsor of Firstlinks. The information included in this article is provided for informational purposes only. Munro Partners do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions.

For more articles and papers from GSFM and partners, click here.



Is the speculative fever in 'hot stocks’ over?

Changing landscape of US large and mid caps

Should you be a value or growth investor?


Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.


Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.


Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.