Highlights
- Rising inflation and subsequent increase in interest rates typically act as headwinds for growth stocks.
- Higher interest rates hurt the assets with longer duration growth more.
- Growth stocks have longer-duration cash flows which are more exposed to even slight changes in interest rates.
Rising inflation and subsequent increase in interest rates typically act as headwinds for growth stocks. To counter the impact of rising inflation, which hit a 40-year high of 9.1%, and tackle the escalating cost-of-living crisis, the Bank of England has been pushing up the interest rates. After rising five times consecutively, the interest rate has hit a 13-year high of 1.25% recently.
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These record high inflation and interest rate levels have implications for stock prices. As inflation levels surge, the nominal interest rates go up and these higher discount rates impact all assets by involuntarily lowering their present value of future cash flows. Higher interest rates hurt the assets with longer duration growth more.
While value stocks have shorter-duration cash flows and are more likely to be considered by investors during times of high inflation, growth stocks have longer-duration cash flows which are more exposed to even slight changes in interest rates. This is because growth stocks obtain a larger proportion of their value from their future earnings.
Despite all these concerns, it is not advisable to abandon growth stocks altogether during inflationary times. Instead, investors can fundamentally analyse the growth stocks and invest in those with bright prospects. Let’s look at 3 growth stocks that UK investors may add to their portfolios.
The Go-Ahead Group plc (LON: GOG)
The shares of passenger transport business, Go-Ahead Group plc, were witnessing a fall and were down by 0.65% at around 3:00 PM (GMT+1), trading at GBX 1,526.00. The company has performed exceptionally well this year and has provided its investors with a YTD return of 128.79% as of 12 July. Even the one-year figures of the firm indicated decent returns of 37.48%. However, its EPS is in the negative territory, at -1.07. The company’s market cap as of 12 July stoods at £663.20m.
John Menzies plc (LON: MNZS)
John Menzies plc was witnessing a fall and were down by 0.50% at around 3:15 PM (GMT+1), trading at GBX 597.00. The company has performed remarkably well this year and has provided its investors with a YTD return of 93.87% as of 12 July. John Menzies pls has produced good one-year return of 92.62%. However, its EPS is in the negative territory, at -1.51. The company’s market cap as of 12 July stoods at £551.72m.
Nanoco Group Plc (LON: NANO)
The British nanotechnology business, Nanoco Group Plc, was witnessing a surge and was up by 2.92% at around 3:20 PM (GMT+1), trading at GBX 35.20. The company has performed well this year and has provided its investors with a YTD return of 75.68% as of 12 July. However, its EPS is in the negative territory, at -0.01. The company’s market cap as of 12 July stands at £110.27m.