Video: What’s on Your Mind? Final Rate Hike, Biotech, GLP-1, and Tailwinds
Kevin D. Collins, CFA;
Senior Vice PresidentClient Portfolio Manager
In this episode, Client Portfolio Manager Kevin Collins addresses the final rate hike, biotech having a moment, the impact of GLP-1 drugs and exciting tailwinds for 2024.
KEVIN COLLINS: Hi. I’m Kevin Collins, client portfolio manager at Alger, and in this episode of What’s on Your Mind, we address some of the most pressing issues that our clients have expressed to us regarding the capital markets and growth stock investing.
The first question we’ll address today is, how do stocks perform after the final rate hike in a Fed tightening cycle?
We believe quite positively. We look back at the last five rate hike cycles that dates back 35 years, in the 12 months subsequent to the final rate hike, stocks performed very well. On average, they were up nineteen percent, and they had positive returns in four of those five instances.
Based on this research, we believe that growth stocks could be a big beneficiary if the Fed’s rate hike in July was the last of this tightening cycle. Our belief is predicated on the long-duration earnings growth profile of growth companies.
Additionally, over the last 18 months, there have been two periods where growth stocks reacted very favorably to the prospect of a Fed pause or a pivot. The first instance was in the early summer of 2022 when investors thought Fed Chair Powell might pause or pivot. And in the months leading up to that conference, growth stocks outperformed.
The second instance was in the wake of the Silicon Valley Bank Corp failure and the regional banking crisis. Interest rates fell, and growth stocks outperformed because we believe investors were very fearful that the credit impulse would be killed, and that there would be less lending and less economic growth as a consequence of that lending.
The second question is, is biotechnology having a “moment”?
Well, biotech might be poised for a moment, particularly in the small cap space. These companies are driven by idiosyncratic, meaning company-specific, catalysts. And therefore, with a pause in rates, we believe that biotech valuations might be reaching an inflection point.
Therefore, if investors can locate companies that have the prospect for good clinical success in their drug development, these stocks might present a good investment opportunity.
The third question is, how have the recent crossover diabetes and obesity drugs impacted the healthcare industry?
We believe quite dramatically and, GLP-1 drugs were originally invented to address diabetes, but they've also had very positive consequences in obesity. Clinical trials are now indicating that these diabetes slash obesity drugs may have very positive consequences and improve cardiovascular outcomes for people afflicted with these diseases.
So, it's probably not a surprise to you that companies like Lilly and Novo Nordisk - their stock prices have done extremely well in 2023.
However, we believe GLP-1 drugs have had negative consequences for other healthcare stocks. Recently, cardiovascular related stocks, we're talking structural heart, med tech companies, they've had their share prices decline quite substantially, and the stocks that are down are likely to have GLP-1 as an overhang in the near term.
We believe that there's one giant positive takeaway, and that is GLP-1 drugs are going to have very positive consequences for our society.
The fourth question is, are there any other tailwinds for the remainder of the year and into 2024 that we're excited about?
Well, we've talked a lot about healthcare investing and particularly small caps. I'd be remiss if I didn't mention generative artificial intelligence. We believe that artificial intelligence is catalyzing the growth in the economy around tech spending. Whereas nine months ago people were concerned about the levels of investment in technology, in the near term given a slowing economy, generative AI has encouraged new tech spending. We believe that some of the biggest beneficiaries of this tech spending are utility scale cloud providers. Data centers are going to require, we believe, a big increase in their computing power and, in our view, semiconductor demand will be driven strongly by the demand for hyperscale processing chips. A company in that area that's got a good market lead in our view is Nvidia.
We believe that the most successful adopters of artificial intelligence will have, one - large proprietary data sets; two – excellent tech talent; and three - the ability to invest considerable sums in generative AI infrastructure.
We believe companies with the best data, the best human tech talent and the capability to invest substantial capital expenses to develop the tech infrastructure will be the winners.