After a huge 2020, growth shares have had a bit of a rest this year.
Technology, specifically, led the way in massive market gains in 2020 after the March COVID-19 trough. The S&P ASX All Technology Index (ASX: XTX) gained a whopping 125% from 20 March to the end of the year.
But this year has been a different story, with growth and tech shares falling out of favour.
The ASX All Tech index remains flat, increasing just 0.9% since New Year's Day.
The rotation to value stocks has been triggered by a fear that inflation would rise as the world recovers from the pandemic. When inflation rises, interest rates could rise.
And that's bad news for high-growth stocks, according to Platinum Asset Management chief executive Andrew Clifford.
"Many high-growth stocks have seen their share prices fall considerably from their recent highs, with bellwether growth stocks such as Tesla Inc (NASDAQ: TSLA) down 27% from its highs, Zoom Video Communications Inc (NASDAQ: ZM) down 45%, and Afterpay Ltd (ASX: APT) down 35%," he said in an update to investors.
"Theoretically, rising interest rates have a much greater impact on the valuation of high-growth companies than their more pedestrian counterparts. As such, it is not surprising to see these stocks most impacted by recent moves in bond yields and concerns about inflation."
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Is the slowdown in growth shares temporary or chronic?
Multiple experts have predicted that the aversion to growth stocks is temporary, and the market would soon return to the 2020 darlings.
T Rowe Price Group Inc (NASDAQ: TROW)'s investment committee for its Australian arm last month already started shifting its allocation from value to growth.
Nucleus Wealth head of investments Damien Klassen also stated last month that pre-COVID deflationary forces would reassert themselves soon.
Clifford disagrees. He has grave fears for growth stocks that so many people ploughed their money into last year.
"For many (but not all) of the favourites of 2020, we would not be surprised to see them fall another 50% to 90% before the bear market in these stocks is over," he said.
"If our concerns regarding long-term interest rates come to fruition, this will be a dangerous place to be invested."
His bearish view was based on his forecast that interest rate rises would be irresistible.
"It is hard to see how we can avoid a strong cyclical rise in inflation," he told investors.
"It is an environment where there is likely to be ongoing upward pressure on long-term interest rates."
And history could serve as an example.
"We only need to look to the end of the tech bubble in 2000 to 2001 for an indication of how this may play out," Clifford said.
"The much-loved 'new world' tech stocks collapsed in a savage bear market, while the out-of-favour 'old world' stocks rallied strongly."
