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Some Stocks May Actually Benefit From Slow US Growth


Good fundamental stock pickers may have the best shot at investment success under a scenario of slow GDP growth in the US and developed world.

Fourth, growth stocks are favored disproportionately by low interest rates given the relative capital intensity of their business plans. Mature companies aren't expanding their capital base by much and generally require capital only for maintenance of their existing capital base. Mature companies tend to fund their maintenance costs through internally generated cash flow and therefore don't require outside financing. On the other hand, growth companies require large amounts of capital (derived from debt and equity markets) since they're expanding their operations. Low interest rates favor virtually all companies. However, growth companies are benefited disproportionately.

How Can There Be Growth Stocks If GDP Growth Is Slow?

First of all, slow growth in the US doesn't imply slow growth all over the world. For example, despite very slow projected growth rates for the US and Europe in 2010 and 2011, the average rate of projected growth in the developing world for 2010 and 2011 is well over 5% per annum. Some of this growth is due to demography. Most of it is due to improving productivity, which in turn, is driven largely by capital availability. High GDP growth rates in less developed countries imply that many companies in those regions will be growing their revenues and earnings rapidly.

Second, if we focus on US equity markets, the fact of the matter is that a large portion of the earnings of publicly traded companies in the US -- probably over 30% -- are attributable to foreign sales. This percentage has been growing very quickly over the years, and particularly sales to emerging markets. For technology companies, the global sales figure is around 50% and growing. Thus, many US-listed companies will benefit from growth in emerging markets. Many growth stocks in the US will be growth stocks precisely because they sell a major portion of their goods and services outside the US where demand is growing fastest.

Third, in a mature economy characterized by slow growth and low margins, the demand from companies for cost-saving and efficiency-enhancing technologies will be acute. In go-go times, inefficiencies can be masked by high revenue growth. But when revenues are stagnant and competition is fierce, profitability must be attained through efficiencies. And this is where technology companies come in. In many ways, in a slow-growth environment, the demand for technology won't wane -- it will actually be enhanced. Furthermore, given the relatively low cost of capital, companies will feel that they can afford to be aggressive in acquiring efficiency-enhancing technologies and they'll thereby fuel high-tech product demand. The bottom line is that many high-tech companies that fulfill the corporate need to increase efficiency will be able to attain high growth rates.
No positions in stocks mentioned.
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