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If Tech is the new value, what is the new growth?

Galina Pozdnyakova
Deutsche Bank Research Management
Stefan Schneider

Tech stocks may become value investments but it likely won’t be a single sector that replaces them as growth stocks. Rather, it will be companies that cross sectors but fit into certain themes, including resilience to a multipolar world, energy productivity, and higher rates.

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The new macro regime has yanked the ‘growth’ label away from technology stocks. Yet reports of their deaths are greatly exaggerated. In fact, many technology companies generate considerable cash and may move towards being considered ‘value’ investments. Inevitably, something will rise and take their place as a ‘growth’ stocks. But instead of belonging to a specific sector, such companies will need to have a set of characteristics that align with the new macro backdrop.
It is not just rising rates that may shift tech stocks from growth to value, or perhaps ‘quality’ investments. Tech faces a progressively more hostile environment. Inflation and slower economic growth are, of course, key macro headwinds. On top of that, tech companies face the risk of increased influence from anti-trust and competition policies. That likely means lower valuation multiples. Shareholders are more demanding too – in this year of rising rates, payouts and cost discipline have been prioritised over last decade’s “growth at all costs” paradigm. As many technology companies mature after double-digit growth, attention thus shifts to how much capital they can return.
So, what are the new growth leaders? The answer is not a single sector, but a number of features that can be found across industries. They revolve around the ability to capitalise on structural shifts in the economy and the need to increase productivity. One such trait is the ability to do well in a world with multiple geopolitical powers and tensions. Themes such as reshoring may favour firms that can scale up near their home markets and absorb the costs associated with that. Fracturing global supply chains is a related trend companies can capitalise on.
A second growth area relates to being involved in the green transition, particularly renewables and materials, as countries adjust their infrastructure and energy systems. Firms involved in efficiency-improving technologies that boost productivity can surpass consumer-focussed tech that dominated much of the past decade but relied heavily on low rates and greater global integration. Interestingly, corporates will find that one does not need to be a tech firm to benefit from tech innovation, as long as you have the cash. Contracting tech multiples can help with that.
At a sectoral level, industrial policy will give a structural boost to companies involved in clean tech, healthcare, computing and cybersecurity. This comes with a caveat. Unlike the growth stocks of last decade, the new growth firms will have to generate positive cash flows, not burn cash. They will need it to finance R&D themselves and acquire new capabilities. That trait will be company-specific. The luxury of reinvesting cash flows will be accessible only to companies with compelling growth stories driven by fundamentals.
Without the tidal wave of the Faangs, the technology sector may no longer be the leading driver of stock market returns it was last decade. Despite that, these companies will continue to matter due to their relative size and ability to generate cash. Still, the retreat from tech can limit market-wide gains and redefine how investors see growth stocks. That will leave a gap for the new growth stocks to emerge.

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