The sell-off in traditional high-quality businesses due in part to rising interest rates has forced growth-focused managers to re-evaluate some of their holdings.
Murdo MacLean, client investment manager at Walter Scott & Partners Ltd. in Edinburgh, Scotland said high-quality growth businesses almost always overcome short-term valuation pressures, provided an investor is willing to wait.
At the start of the year, MacLean said his team anticipated that a period of rising rates “would have a technical impact on discount rates that many investors pay attention to, particularly in businesses of long duration growth.”
The market shifted away from traditional high-quality growth businesses toward cheaper, more cyclical businesses, which MacLean said was likely driven by optimism around a global economic recovery at the time.
“That was a relatively easy trade for some investors to make,” he said.
Companies such as robotic surgery firm Intuitive Surgical, Inc., Taiwan Semiconductor Manufacturing Company, Limited and Netherlands-based ASML Holdings came under pressure as they were “easy targets” for investors seeking to sell expensive companies in favour of buying the cheaper end of the market.
From a performance standpoint, it made sense in the first quarter, he said. But the long-term outlook for those companies is as good as it was before the pandemic, if not better.
As central banks continue to raise rates to combat inflation, MacLean said he’s looking to “the quality names in our portfolio to weather this storm more successfully.”
Those include tech giants Microsoft Corporation and Google parent company Alphabet Inc., where he said “underlying momentum was still remarkably healthy.” If the economy continues to slow, the market is more likely to reward these resilient growth companies, he said.
“There’s still a possibility of further contractions in valuation, but I don’t think of the magnitude that we have already seen,” MacLean said.
With some high-quality companies still priced much lower than their recent highs, investors have an opportunity to “cherry pick” businesses that are trading on much more attractive valuations, he said.
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