In an Uncertain Year, International Growth Stocks Can Still Shine

Why John Remmert thinks growth stocks look favorable in 2021.

    John Remmert

    John Remmert Senior Vice President, Senior Portfolio Manager, Franklin Equity Group®

    "With the global economic outlook still uncertain, it is clear to us that central banks and fiscal stimulus will be key to keeping equity markets stable during the next few months. But for many investors, growth equities are likely to remain in favor as economic activity is still weak.”

    The world faces greater uncertainty heading into 2021 than in years past. COVID-19’s unpredictability and the inability of the United States and many European countries to keep the outbreak in check could lead to a greater divergence in growth between those economies that can resume some semblance of normalcy and those that will need a vaccine—which may be close at hand—before people can return to their pre-pandemic routines.

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    While on the surface this might suggest a shift toward domestically focused companies in Asia in 2021, we would expect that those companies serving the global market in areas like e-commerce, cloud services, home improvement and payment services—that have been able to thrive during the pandemic— can continue to stand out regardless of where they are based.

    An Uneven Return to Normal

    The global pandemic sparked a sharp global recession, as government lockdown measures aimed at limiting its spread in the spring of 2020 severely disrupted economic activity. Despite unprecedented policy support from governments and central banks, the World Bank expects the recession to be the deepest in decades, with the world economy contracting an estimated 5.2% in 2020.1

    The year ahead should be one of recovery—albeit an uneven one. Those economies that have effectively limited the spread of the coronavirus are likely to do better than those that have not, in our view. Without greater stabilization in COVID-19 infection rates in the United States and Europe, we believe it will be difficult for the global recovery to gain greater traction, even as certain major economies like Australia, China and Japan have effectively limited the coronavirus’s spread.

    Moreover, the return of restrictions in places like France, England and Germany could further constrain economic activity through the winter until people feel more confident that infection rates have stabilized. Although the World Bank expects economic growth of 4.2% in 2021,2 the global economy in that year is unlikely to fully recapture the ground lost during the pandemic, and we expect forecasts to remain much more uncertain given the unpredictable outlook for COVID-19 cases across significant parts of the world.

    A Fiscal Stimulus Boost?

    The US Congress could smooth out the volatility in the domestic economy by passing a needed stimulus deal. While the November election results have again showed how polarized US politics are, a comprehensive deal is still possible, in our estimation, but the size could be smaller than would be likely if Democrats had had a more decisive electoral victory. In the meantime, extraordinary monetary policy from the US Federal Reserve and other central banks will continue to be the main tool to support the global economy.

    Regardless, a vaccine is going to be crucial in fostering a more durable economic recovery, not only in the United States, but also in Europe. Preliminary late-stage clinical data on at least two of the vaccine candidates shows they are both safe and effective. Other late-stage clinical trials are ongoing. We expect vaccine approvals to start to come in early 2021, though it will likely take the better part of a year to achieve a level of vaccination that will allow people to begin ending social distancing. Recent data on some therapeutics have been less encouraging, which may put greater pressure on administering an effective vaccine to push growth rates higher.

    Sticking with International Secular Growth Companies

    With the global economic outlook still somewhat uncertain, it is clear to us that central banks and fiscal stimulus will be key to keeping equity markets stable during the next few months. But for many investors, growth equities are likely to remain in favor as economic activity is still likely to be weak. Although we have seen suggestions that a rotation to value is just around the corner, we believe we would need to see sustained improvement in oil prices and higher interest rates first, given the tilt toward the energy and financials sectors in typical value benchmarks.

    We believe that innovative growth companies with global businesses should continue to shine in the current market and economic environment. We have seen the acceleration of trends such as e-commerce adoption and cloud computing during the pandemic, and we expect these trends to continue long after the pandemic is over. Furthermore, those companies in areas like autonomous driving and clean technology should remain a bright spot over the longer term.

    We continue to advocate that a focused, yet highly diversified portfolio with an emphasis on well-managed companies that have durable competitive advantages and good growth prospects can provide investors with excellent outcomes during both uncertain and certain times.

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    ENDNOTES

    1. Source: World Bank, Global Economic Prospects, June 2020. There is no assurance that any forecast, estimate or projection will be realized.

    2. Ibid.

    WHAT ARE THE RISKS?

    All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity.