Pandemic Growth Stock Stars Fall in Bear Market

High-growth tech stocks that have shone in the coronavirus crisis have entered a bear market as changing consumer habits and the prospect of a sharp rise in US interest rates force investors to retreat from one of the most lucrative jobs of recent years.

The MSCI World Growth Index, which tracks high growth stocks in earnings and sales, and includes names such as Amazon, Tesla and Nvidia, fell this week to a level 22% below its peak in November. This drop left it in a technical bear market, defined as a drop of 20% or more from a recent high. Other than a brief dip in March 2020, this is its biggest peak-to-peak drop since the financial crisis.

April was particularly brutal. The growth index this month posted one of its worst performances in at least 20 years, with the tech-focused Nasdaq Composite falling 4% on Tuesday alone.

With US inflation running at 8.5% and the Federal Reserve expected to raise interest rates by more than 2.25 percentage points by the end of the year, some traders now believe the benign conditions that supported a recovery of up to 250% in the growth index over the past decade have changed for good. Some argue that the days of huge gains from buying speculative stocks with an attractive growth history but little current earnings may be over.

“People now realize that investing is more than just handing out capital like lollipops at a school party to anyone with an idea for flying taxis or carbon-free hot dogs,” said Barry Norris, chief investment officer at Argonaut Capital, which runs a hedge fund and predicted a bear market for most assets.

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“Every time there’s been a sell-off in the markets, there’s been a central bank put,” he said, comparing monetary stimulus packages with options that protect against market drops. . “Central banks are not going to come to the rescue this time. »

Among the main victims this year is Cathie Wood’s Ark Innovation fund, the flagship child of growth company investing, which owns stocks such as Coinbase, Block and Spotify, and which is down 48% this year. until April 28. Scottish Mortgage Trust, known for its bold bets on tech groups, is down 34%. A number of so-called “Tiger Cub” hedge funds, spun off from Julian Robertson’s Tiger Management and often big investors in tech stocks, have also been hit hard in recent months.

A Goldman Sachs index of unprofitable technology stocks, which peaked early last year, has fallen 39% this year.

During a bull market that sometimes seemed endless, growth stocks steadily outperformed the so-called cheap value stocks. Investors who held or bought during market downturns, including the pandemic plunge in March 2020, were handsomely rewarded as central banks injected stimulus, pushing stocks to even higher highs.

But the prospect of higher rates has hurt low-profit, high-growth tech stocks, as future cash flows from these companies look relatively less attractive. Meanwhile, soaring inflation is limiting central banks’ ability to respond to crises, just as fears are growing about the health of China’s economy.

Some investors seem reluctant to let go, despite the rapid drop in benchmark US government bond prices. Brian Bost, co-head of equity derivatives for the Americas at Barclays, said growth stocks remained popular among investors, despite the recent selloff, with some fund managers still in denial.

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” The fact is that [growth stocks] are still trading at very high multiples,” he said. “If something is down 50%, the natural psychology is that it’s really hard to sell a loser. But I think there’s more pain to come.

Some bull market stars are now feeling the heat. Ark’s Wood, for example, wrote on Twitter this week that the rising US dollar “suggests Fed policy is already too tight,” even though the fed funds rate is still in a target range that peaks at 0.50%.

Some hedge fund executives are bracing for tougher times ahead. Luke Ellis, chief executive of the $151 billion Man Group, told the Financial Times last month that he expected “a tough year for equities”, while Sir Michael Hintze, founder of CQS, bet against unprofitable tech stocks, according to investor documentation seen by the FT.

“It’s a new regime for the markets. It’s going to be harder to make money for traditional investors,” said Michele Gesualdi, founder of London-based Infinity Investment Partners.

Hedge funds adapt to more difficult prospects. U.S. hedge funds, for example, are showing net positions — the balance of bets on price ups minus bets on price downs — near five-year lows, according to a Morgan Stanley note to clients. of the main brokerage.

And while some investors used the market sell-off following Russia’s invasion of Ukraine as a buying opportunity, Lansdowne Partners, one of London’s biggest hedge funds, said it was “baffled by this reaction.

“We think this is deeply wrong,” he wrote in a letter to investors seen by the FT, adding that “the market dynamics of the past 12 years since the [global financial crisis] have fundamentally changed.

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