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High-growth world gone forever, says Hyperion’s Arnold

The record quarterly economic contraction confirmed on Wednesday is a precursor to a sustained period of low economic growth that will challenge the outlook for investors, and confine returns to a limited number of dominant companies.

That is the view of Hyperion Asset Management’s chief investment officer, Mark Arnold, who believes an investment environment characterised by reliable growth has been replaced by conditions akin to Japan.

Hyperion’s Mark Arnold says the long-term cost of climate change will play a bigger role for investors than COVID-19.  Glenn Hunt

“The negative GDP growth figures are further evidence that the high-growth world that existed [prior to the global financial crisis] is gone forever,” Mr Arnold said.

“We believe the structural headwinds of ageing populations, high debt levels, the hollowing out of the middle class and the disruptive impact of climate change will ensure economic growth and aggregate profit growth remains low for the next decade and beyond.”

The stark assessment favours Hyperion’s growth-bias investment strategy, which preferences companies that are able to increase revenue and profits even if the wider economy is flat or shrinking.

This trend has been a key contributor to the considerable outperformance for technology stocks such as Afterpay, Xero or Kogan.com this year, which has continued to mount pressure on value investors.

But while Credit Suisse strategist Damien Boey agreed that the low-growth environment favoured such stocks, he said investors could see a sharp sell-down in “overcrowded” names in the growth category in the coming months.

Right now the markets are looking for a rotation out of growth stocks and high-quality stocks.

— Damien Boey, Credit Suisse

In the event of material progress towards the completion and distribution of a vaccine, among other factors, there could be a rotation out of growth in the short-term.

“Right now the markets are looking for a rotation out of growth stocks and high-quality stocks,” Mr Boey said, pointing to the huge share price gains among the US technology giants as having the potential to lead a reversal.

The technology-heavy Nasdaq composite index closed at another record high on Wednesday, passing the 12,000-point milestone to end the session at 12,056.

That leaves the US index a whopping 33.7 per cent above where it ended 2019, at odds with the Australian market performance, according to JPMorgan equity strategist Jason Steed.

“Value” markets, including the ASX 200, FTSE 100 and EuroStoxx, continue to lag because of the dominance of tech in the post-March rally, Mr Steed said.

But while the immediate impact of the pandemic will remain a prominent contributor to the challenging economic conditions ahead, Mr Arnold expects the cost of climate change to exact a heavy toll too.

“COVID-19 has resulted in a significant reduction in economic activity but climate change is likely to be much more devastating to long-term future economic growth and activity,” the fund manager said.

This article was originally published in Australian Financial Review.

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