How will growth stocks perform in a rising rate environment?

“Probably not,” said Wes Ashton, portfolio manager and director of growth strategy at Harbourfront Wealth Management Inc. in Vancouver.

Every time central banks go up, “it will remind them that money is going to keep getting more expensive and the growth outlook will be tough for them,” he said. “But at some point, [tech stocks] are going to be attractive.

On Wednesday, the US Federal Reserve raised its key rate by 75 basis points and maintained that more hikes are to come.

“I wouldn’t say the sector has necessarily bottomed out,” said Ryan Crowther, vice president and portfolio manager at Franklin Bissett Investment Management in Calgary. “I still think there are components of the tech sector that still reflect quite favorable valuations.”

With macro factors driving down stock prices for tech stocks, is this a great buying opportunity?

“I think so,” Ashton said. “Generally, if I had money to deploy, I would increase those levels, depending on your risk tolerance. But I think when you add those good quality names [like Apple and Amazon], and you look over the next three or five years, I think they’re going to be in a better place than they are now. Owning good quality businesses at more attractive prices makes sense.

Crowther said “selectively it does,” especially for names that are profitable and generate cash flow.

Crowther, which manages the Franklin Bissett Dividend Income fund, added to its positions in Cisco Systems Inc. and Intel Corp. over the past two months. He said both companies had favorable valuations in 2022 and still do. Moreover, he likes the fundamentals of both companies.

At the start of the year, both holdings had a 3% weighting in Franklin Bissett’s US equity portion, and Crowther each increased to around 4%. The portfolio is approximately 60% Canadian equities, 20% US equities and 20% fixed income securities.

Ashton said rising interest rates can affect a company’s ability to raise capital to invest in its business.

“When central banks raise interest rates, obviously the ability to borrow becomes more expensive, and as a result money just becomes more scarce to flow back to some of these companies that exploit the public markets. or different institutions to get money,” he said.

There have been recent concerns that if central banks aggressively raise interest rates in the future, it could tip the global economy into a recession.

Given that economic data is released months after the economy entered a recession, “we could very well be in a recession already,” Ashton said, adding that he doesn’t think we are. He also observed that the global economy may have pulled out of a recession before data suggests it is over.

Regarding the resilience of growth stocks during a recession, Ashton pointed to the 2008 financial crisis.

Growth stocks “had exceptional growth in the middle of [2008] recession, because the markets are pulling the economy out of recession because they are forward thinking,” he said.

“What happens is people say, ‘In the future, stocks will be worth less because there will be less money to invest in these companies.’ The same goes for when, all of a sudden, things get more positive with prospects. [with] these growth values, [investors] going to say, ‘Hey, you know what? Their future income is going to be really good for those specific reasons. “

Ashton added that he wasn’t sure growth stocks would lead the charge outside of a recession, but that “these are the most beaten stocks” and “at a certain point they become very attractive and you get more net buyers than you get sellers.”