AUGUST 2020 Global Investment Strategy

Are Growth Headed South? Don’t Count on It.

CALLS FOR THE IMPENDING COLLAPSE OF GROWTH EQUITIES, PARTICULARLY Nanette Abuhoff Jacobson TECH STOCKS, ARE GETTING LOUDER AS THE MARKET MARCHES HIGHER Managing Director and AND THE SHARE OF THE BIGGEST TECH PLAYERS GROWS LARGER. Multi-Asset Strategist Recent concerns have focused on frenzied retail trading, high at Wellington Management LLP trading volume generally, and the dramatic rise in valuations since and Global Investment late March. Strategist for Hartford Funds I agree that valuations among the tech leaders are at expensive levels relative to their history. I also concede that the growth segment of the market has taken on some speculative characteristics as of late. However, what to do about it is another matter entirely. Go into cash at 0%? Rotate into bonds yielding 60 basis points?1 Move into more defensive sectors? Shift from growth- to value-? My answer is to not wholesale exit the market, but rather to reassess equity exposures and seek to balance portfolio risk in light of current conditions. This may mean, among other things, reducing your growth- exposure somewhat and selectively increasing your stake in value stocks. In today’s environment, I believe there are many strong value-oriented companies that may be attractively priced because they have been unfairly punished along with weaker cyclical companies. Key Points That being said, overall, I continue to favor growth stocks over value stocks Amid current market conditions, for the medium to longer term. Why? In my view, growth-driven companies may want to reassess should continue to garner a premium in a low-growth, low- world post equity exposures and seek to COVID-19. balance portfolio risk. Tech Still Has Legs ... Nanette continues to favor growth stocks over value stocks, especially FIGURE 1 highlights that tech-stock valuations, while indeed lofty by for the medium to longer term historical standards, may not be quite as rich as they appear. Price/earnings because growth-driven companies (P/E) ratios2 have lagged the appreciation in the tech index because will continue to garner a premium earnings have been so strong. In , the technology sector has thrived in a low-growth, low-yield world in the era of COVID-19, and I believe it’s likely to continue to post strong post COVID-19. earnings going forward due to ongoing structural demand for data, storage, cloud computing, e-commerce, and artificial intelligence. Nanette expects that “safe” assets such as government bonds and … but Is Not Without Risks higher-quality credit may fare well, But investors should be cognizant of the risks associated with the sector. while value-oriented equities may For example, regulation continues to loom over the high-profile mega-cap struggle more than their growth- names and will likely remain a source of headlines. Higher interest rates, oriented counterparts. while not likely anytime soon, could also trigger a correction (as falling rates have been a driver of elevated tech-stock valuations). Even without these headwinds, the tech sector could still experience a near-term correction following its unprecedented rise this year. 1 A basis point is a unit that is equal to 1/100th of Investment Takeaways 1%, and is used to denote the change in a financial I would suggest three actions for investors to consider taking now: instrument. The basis point is commonly used for 1) Stay tech, but less long: In terms of risk management, trim tech calculating changes in interest rates, equity indices, exposure but remain overweight the sector. and the yield of a fixed-income security. 2 2) Balance your equity “style” risk: Consider rotating some of your growth Price/Earnings is the ratio of a stock’s price to its .

1 Global Investment Strategy

exposure to value to better balance portfolio risk. 3) Seek out industrial leaders: Look for reasonably valued industrial companies with resilient top-line growth, strong margins and free cash flow, and the power to take market share from rivals. What’s the main risk for equity investors? If the economy’s nascent recovery falters amid a global resurgence of COVID-19, a deeper, longer recession could ensue, potentially taking equities down with the broader economy. In that case, I would expect “safe” assets such as government bonds and higher-quality credit to fare well, while value- oriented equities would likely struggle more than their growth-oriented counterparts. FIGURE 1 Just How Rich Is Tech? Not As Rich As You May Think. 250 Tech Index Tech P/E 200

The views expressed here are those of 150 Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. 100 Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management 50 teams, and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This 0 material and/or its contents are current as of the time of writing and may not 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- l- be reproduced or distributed in whole

Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju or in part, for any purpose, without the express written consent of Wellington Source: Bloomberg. Chart data as of 7/30/20. “Tech index” shown is the S&P Management or Hartford Funds. Information Technology Sector Index. “Tech P/E” is the tech index’s price/ earnings ratio, calculated as the last market price divided by trailing 12-month earnings per share of the companies in the index. Earnings per share is the projected growth rate in earnings per share for the next five years.Past performance does not guarantee future results. Indices are unmanaged and not available for direct investment.

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Important Risks: Investing involves risk, including the possible loss backed by the full faith and credit of the US government as to the of principal. • Investments in particular sectors may increase timely payment of principal and interest. and risk of loss if adverse developments occur. • Different investment Mutual funds are distributed by Hartford Funds Distributors, LLC styles may go in and out favor, which may result in under-performance (HFD), Member FINRA. Certain funds are sub-advised by Wellington of the broader . • Fixed income security risks include credit, liquidity, call, duration, event and interest-rate risk. As interest Management Company LLP. HFD is not affiliated with any fund rates rise, bond prices generally fall. • US Treasury securities are subadviser. 219039 MFGS_080520

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