1 down, 2 to go: The 3 recovery signs Nick Griffin is waiting for

If you are like me, you're probably sick of reading about rising interest rates, inflation and the dreaded R word - recession. We get it. It's not the easiest time to be an investor. We're in a bear market. 

Unfortunately, for us investors, drawdowns and corrections are all part of the process of long-term investing. But that doesn't mean the good times are over. Not in the slightest. They are just taking a long-awaited hiatus. 

Nick Griffin, the founder partner and chief investment officer of Melbourne-based global equities boutique Munro Partners, has seen this all before. In fact, he says "there's no escaping a bear market". 

"I've actually been through five bear markets in my lifetime. Some of them are long, and some of them are short. This was officially a bear market a month ago," he explains. 

The Munro Global Growth Fund (ASX: MAET) is, obviously, a global growth investment product, and as such, has been caught up in the sell-off in long-duration stocks. But this is not the first time this has happened, Griffin says. 

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"It's had a 20% drawdown from its peak and roughly 15% over the last 12 months... It's the fifth time that's happened in my career. It happened in 2018. It happened in 2014. It happened in 2012, and it happened in 2008," he says. 

So if we can all agree that sell-offs are normal, how should investors navigate the current turbulent period? According to Griffin, it's simple. Don't give up on the world's greatest companies, be aware that there could be a little more pain on the horizon, and remember that share prices always follow earnings over the long term. 

"On any three to five-year view, these big structural changes that are occurring in the world are not going to stop just because central banks got inflation wrong," he says. 

"We're not going to stop shifting to the cloud. We're not going to stop wanting good, innovative healthcare products. We're not going to stop trying to decarbonize the planet. All these things are still going to happen. 

"All you did was just reprice them and that repricing was long overdue... There might be a bit more to go, but ultimately just remember that the companies who grow earnings in the long run, are the companies you want to be invested in. And those companies will always, always follow their earnings in the long run." 

In this wire, Griffin shares why the Fund is sitting on a lot of powder, the three signals that he is watching to know when to dive on in, as well as some of the stocks on his wishlist - some of which he is adding to right here, today.

Plus, as a little challenge, I asked him to pick one stock that he is backing as a major winner for the next decade. And it may surprise you which company he picks. 

Note: This interview took place on Tuesday 26th July 2022. You can watch the video or read through a written summary below. 

Time codes for time-poor investors: 

• 0:29 – What has gone wrong for growth investors
• 1:55 – The outlook for growth
• 3:08 – 3 signals for growth investors to watch
• 5:08 – Where Nick has been putting this money to work
• 6:20 – Major themes from the US reporting season
• 7:47 – Why Nick is sitting on a lot of cash 
• 9:21 – Stocks on his wishlist
• 10:42 – Impact on Climate Fund holdings
• 12:35 – Nick's greatest lessons from his career
• 14:08– Nick's 10-year stock idea

Growth investors face continued pressure 

It doesn't take a genius to realise that global growth (and local growth) investors have experienced some severe growing pains over the past 12 months. 

"If you look at the unprofitable tech within the NASDAQ, it's off 70% from its peak. That's what the NASDAQ did back in 2000," Griffin says. 

"If you look at a lot of companies, and I'm sure here in Australia, people would notice stocks down 70-90%. So it's been a prodigious growth selloff... The thing that was doing that was rising interest rates; rising interest rates caused this destruction in high multiple growth stocks." 

This makes sense, as when rates rise the first thing to get hit is long-duration stocks, he says. 

"From my point of view, high-interest rates will now cause an economic slowdown, which will hurt cyclicals, banks, and the broader market," Griffin says. 

"If anything, that means growth equities actually sit quite well here, because rates have probably peaked for the cycle. And if rates have peaked, that kryptonite, those higher interest rates that have been hurting growth assets is now going to back off." 

3 signals investors should look out for to know when to dive back in

As mentioned briefly in the introduction, the Munro Global Growth Fund is currently sitting on quite a bit of dry powder. In fact, the Fund currently has a 60% net exposure (so 40% cash/shorts). 

So which signals is Griffin looking out for to know when to dive back in? Well, there are three, to be exact. 

1. Long-term interest rates

The first signal Griffin is looking out for is the peaking of long-term interest rates. Which he notes, has already started to happen. 

"The Fed is raising rates so much that it's causing an economic slowdown. So even though short-term rates might go up, long-term rates are probably capped here," he says. 

"That's very good for growth equities, and long-duration asset classes, because that kryptonite that's been hurting them is now running out of steam." 

With this in mind, Griffin believes that the derating of the market has probably finished and that there shouldn't be significant drawdowns in growth names from here. 

2. Earnings downgrades

The second signal on Griffin's radar is earnings downgrades. 

"We see it with companies like Walmart more recently or Target before that. The reality is we've double-ordered a whole bunch of stuff that we don't really need... It's going to cause big downgrades," he says.  

"If you want inflation to go down, you need goods prices to fall, that's earnings downgrades. That bit's still to come. So from our point of view, we're still waiting for those earning downgrades to flow through the market." 

3. Time in a bear market

The last thing on Griffin's radar is time, as on average, a bear market lasts 300 days and falls 37%. 

"We're about 120-140 days through this one, and we've fallen half that. So history would suggest we could be only halfway through this," he says. 

"It is important to recognise, as Warren Buffett would say, it's only when the tide goes out that you notice who's not wearing bathing suits. That's the time when these things start to come up. So just be a little bit prudent about what else could actually go wrong here, because this is normally the time where those things start to happen." 

Why Griffin is sitting on a lot of cash (and the stocks he's been buying)

As an absolute return product, MAET can short stocks. So some of that 40% cash mentioned above is actually in positions the Fund is shorting right now. 

"There is a good opportunity to short sell companies here. There are big earnings downgrades coming, particularly amongst things like retail, commodities, industrials, etc. So those are areas we are short and that equals cash for the fund," Griffin says.

So where is Griffin and the team putting that money to work? Well, he's turning his back on high multiple growth stocks like Atlassian (NASDAQ: TEAM), Hellofresh (ETR: HFG) and Trade Desk (NASDAQ: TTD), and instead, looking for companies with earnings resilience. 

"The next bull market, on average, last 64 months, so you don't actually have to pick the bottom to make money," he says. 

"From our point of view, we just couldn't be more excited about the opportunities that are presenting themselves here. But ultimately, we are trying to be a little bit patient about when we execute on them." 

These opportunities include Microsoft (NASDAQ: MSFT), Visa (NYSE: V), ASML (NASDAQ: ASML) and Nvidia (NASDAQ: NVDA) - the stocks which Griffin believes shouldn't have been sold off in the first place. 

"What people are going to want now, for this next phase of the bear market, is earnings resilience and growth... Anything that can hold its earnings or grow its earnings through the cycle is going to be sought after," he says. 

"We saw this happen with Danaher (NYSE: DHR), which is the company we own in healthcare, last week when it reported, and that's the sort of thing people are going to be looking for - stocks that are going to see them through this downturn.

"At some point, we'll be able to look through the valley of the downturn, we just don't think we're there yet. The cuts haven't actually started. And you're going to see a lot of quite frankly, bad results. And we suspect they probably won't be rewarded just yet." 

The greatest lesson from a career in markets 

The key lesson Griffin believes investors could benefit from right now is that share prices follow earnings in the long run. 

"In between, there are these macroeconomic events like what we've been through recently. The Fed got inflation wrong. We all had the wrong risk-free rate plugged into our models. We adjust the risk-free rate and asset prices go down. We get it. But that's largely happened," Griffin says. 

"Ultimately, just remember that the companies which grow earnings in the long run, are the companies you want to be invested in, and those companies will always, always follow their earnings in the long run." 

Whatever you do, don't get sucked into selling a great company, he says, especially in the face of inflation, he says. 

"Inflation has nothing to do with whether Amazon's (NASDAQ: AMZN) retail business will continue to grow or their cloud business will grow," Griffin says. 

"Just keep focusing on those earnings. Earnings will ultimately leave you with the absolute returns you're looking for." 

Griffin's #1 pick for the next decade

Around seven months ago, Griffin pitched Nvidia as his number one pick for 2022. Since then, its share price has cascaded by more than 40%. Despite that, Griffin has selected Nvidia as his top pick for the next decade. 

"At the time, Nvidia was our best performing company from 2021. So far this year, it's our worst," he says. 

"For those that don't know, Nvidia is a semiconductor company. It's effectively a hardware-software model for artificial intelligence. Their semiconductors allow computers to process things very quickly. It works very well in data centres, and in artificial intelligence (AI).

"On top of that they've built a software layer. So if you are trying to build a chatbot, for instance, it's probably running off Nvidia software and hardware within a data centre." 

We are currently at the start of a huge structural shift towards mass use of AI, Griffin says, arguing every company in the world will need to start to invest in this burgeoning software. 

"When they invest in AI, they're going to invest in Nvidia's software and hardware... They are effectively a monopoly. They do not have competitors, particularly at the software level today," he says. 

"So from that point of view, we love this company on a one to 10-year view. We think the earnings of this company are going up more than seven times in the next 10 years." 

Like many technology names, the stock rose to an eye-watering P/E of 50 times last year. Now, it has derated to a P/E of 25 times, Griffin says. 

"But the earnings are still the same," he says. 

"If its earnings continue to grow for the next seven years till the end of the decade as we think, and they go up seven times in that timeframe, is the P/E of the company going to go from 25 all the way to five or is the company eventually going to follow its earnings?" 

Griffin is adamant it's the latter, noting that the "noise" of markets has now created an incredible opportunity to pick up this stock at a 40% discount. 

And who doesn't like a bargain?

Want to learn more?

Munro focuses on identifying and investing in companies that have the potential to grow at a faster rate and on a more sustainable basis than the peer group. To find out more, visit the Munro Global Growth Fund Profile or their website.