The Australian Securities Exchange (ASX) has been neglected by newer investors in recent years. But the ASX 200, comprised of the 200 largest Australian companies by market cap is now at 1,418 points, surpassing its pre-pandemic value. And in the past year alone, it’s risen by 13%.

Inflation and interest rates

And critically for the ASX, Australian monetary policy is starting to diverge from the norm in 2022. The country’s Consumer Prices Index inflation rate is at a manageable level of just 3.5%. Other western nations can only look at Australia with envy; in the UK, it’s 5.5%, the Eurozone is at 5.1%, the US at a sky-high 7.5%.

The inflation situation has forced the Bank of England to raise the base rate to 0.5%, and HSBC expects it to Open My IG 1.25% by the end of the year. Meanwhile, the Bank of America projects the US Federal Reserve Open My IG raise interest rates to as high as 3%.

This negative market sentiment has seen growth stocks in fast-moving, debt reliant sectors such as biomedicine and technology see huge capital falls. For example, Meta Platformsand Netflix have both lost nearly 50% of their value in recent months.

The relationship between growth stocks and interest rates is simple. Investors expect growth stocks’ share prices and financial performance to accelerate faster than the market average. To achieve this, they are often reliant on cheap borrowing, fueled by low interest rates. As growth stocks are usually in the early stages of development, they come with significantly higher risk, which counterbalances the promises of inflated returns.

And as interest rates rise, growth stocks become less attractive as they can borrow less money and face increased payments on debt. This creates a negative feedback loop, which sees capital flight to better established blue-chip value stocks, that offer lower returns in exchange for security.

But Australia is a different John Dory. While the Reserve Bank of Australia has stopped buying government bonds, Governor Philip Lowe has recently stressed that ‘ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates,’ and that ‘when the time comes, that will be a shock to people who had only got used to interest rates falling.’ Lowe accepts a rate rise could come in 2022 but has previously forecast 2024 as the most likely time for rates to rise.

And as a toxic combination of inflation and interest rate rises hit the more popular equity markets, capital flight from growth stocks to value stocks can make value stocks paradoxically overvalued. This leaves the less popular Australian Securities Exchange as an outlier, with a developed market hosting growth stock opportunities with a unique advantage over their international peers.

And many companies have spotted this. 2021 saw 240 Initial Public Offerings on the ASX, raising $13 billion of capital. And according to the ASX, these IPOs are up 17% compared to their launch prices.

All numbers below are in Australian dollars unless otherwise specified.

 

Top ASX growth stocks

1) GQG Partners (ASX: GQG), was the ASX’s largest IPO in 2021, raising $1.2 billion on an initial $5.9 billion market cap. The company launched at $2 a share but is now down 24% to $1.52. With US$91.3 billion under management, up from US$85.8 billion in September, the company invests in active equity portfolios. CIO and Chair Rajiv Jain has recently pivoted away from tech stocks, saying ‘technology is no longer the next growth spot; it’s yesterday’s growth spot.’ The company is now concentrating on base metals, utilities, and healthcare. It’s also investing heavily in emerging markets, including China. Morgans analyst Scott Murdoch has the stock as a ‘sector recommendation,’ with an ‘attractive valuation relative to flows momentum, earnings quality and growth potential.’

2) 29Metals (ASX: 29M) also launched its IPO last year. At $2.61 per share, the $1.25 billion copper miner is down from its $3.15 January record, but still up 28% since it started trading in July. With copper trading at a near historical high, Goldman Sachs analyst Jeremy Currie believes a long-term bull market for commodities is approaching, and that ‘there has rarely been a better time to add commodities to a portfolio, In April last year, the bank even said that ‘copper is the new oil,’ and there is ‘no decarbonisation without copper.’ And as the world pivots towards net-zero, some analysts are speculating that the rising demand for copper could help contribute to a mining super-cycle.

3) NextGen Energy (ASX: NXG) is the new uranium miner on the block. It has an advantage over established rivals Paladin and Energy Resources of Australia, as it is also listed on the TSX and NYSE, which gives it access to North American capital. Recent unrest in the top uranium-producing country in the world, Kazakhstan, has highlighted the fragility of the commodity’ supply. Uranium is critical to nuclear power, which currently accounts for 10% of global energy needs.

Moreover, as Brent Crude and LNG become ever more expensive, energy security is likely to move up the political agenda. The uranium spot price is now at US$43, with the Bank of America predicting it will hit US$60 by the end of this quarter. The spot price hit a five-year high of US$46 in November last year, coinciding with NextGen’s $8.60 share price record. And at $6.90 right now, NextGen could represent an excellent growth stock as the demand for nuclear energy grows while depleting oil reserves rise in price.

4) Judo Capital Holdings (ASX: JDO) is Australia’s very own challenger bank. Its November IPO made it the first bank to launch a new listing in the country since Macquarie in 1996. At $1.98 per share, the bank is trading slightly below its IPO price, but this growth stock has many positives. First, when interest rates eventually rise in Australia, its profits will rise with them. Second, institutions own 30% of the bank’s shares, indicating a favourable success profile. It finally became profitable this year and aims to grow earnings by 55% in 2022. Third, it operates in a specialist niche, as ‘Australia’s only challenger bank purpose-built for small and medium businesses.’ With a $2.2 billion market cap, it has significant growth potential.

5) Airtasker (ASX: ART) is the Australian answer to Upwork, Freelancer, and Fiverr. At $0.70 a share, the jobs marketplace company is trading at a near historical low. But recent Q2 results showed that its gross marketplace volume had risen 39% quarter-over-quarter to $48.6 million, while revenue increased 37.5% quarter-over-quarter to $8.1 million. And full-year guidance for GMV is between $191 and $194 million, an increase of 25% to 27% over FY 2021. The platform is growing rapidly in the UK and US as well as Australia, with significant potential for further upside. 2.2 million freelancers contributed £162 billion to the economy in 2020 in the UK alone. And as remote working becomes entrenched and previous norms break down, these numbers are only likely to increase.

6) Li-S Energy (ASX: LIS) shares are worth $1.07 at present, less than half their record high, but still up on their IPO price of $0.85. The company has raised a cash balance of $52.9 million to ‘to pursue its commercial and research and development activities.’ The company believes that its lithium-sulphur battery technology could replace lithium-ion tech found in laptops, EVS and mobile phones, by integrating patented ‘Boron Nitride Nano-tube Technology to increase energy density and extend battery cycle life.’

And it has an agreement with Boeing subsidiary Insitu Pacific ‘to integrate, test and eventually field Li-S Energy battery into Insitu Pacific’s range of Uncrewed Aircraft Systems.’ If this trial proves successful, the growth stock could explode. Of course, it’s far from the only company investing in battery technology.

7) Clarity Pharmaceuticals (ASX: CU6) was the largest biotech IPO in Australia last year. However, at $0.72 a share, it’s fallen more than 50% since its August IPO. But Chairman Alan Taylor thinks the company will ‘deliver exceptional clinical and corporate results and we are confident that those results will be a significant catalyst in delivering capital growth for our shareholders.’

The company is developing multiple radiopharmaceutical cancer treatments, based on its proprietary SAR technology which enables ‘superior imaging and therapeutic characteristics of radiopharmaceutical products, addressing the current manufacturing and logistical limitations.’ Its lead product, SARTATE, is in clinical trials for neuroblastoma and neuroendocrine tumours. Arguably, its falling share price reflects the uncertainty; but a breakthrough could send it soaring.

😎 Block (ASX: SQ2), formerly Square, is now dual-listed on both the NYSE and the ASX. According to ASX group executive Max Cunninghan, Block CEO Jack Dorsey’s decision ‘could be the most important listing on the ASX since BHP in 1885’, saying ‘they could have found other ways to fund this, so for them to consciously list here is really, really significant.’

With a US$56 billion market cap, it’s one of the largest companies on the ASX, but it’s still in a growth phase. Square processed US$112 billion in payments last year, a fraction of Mastercard and Visa which both transacted over US$800 billion. But its transaction volume is up 40% in the first three quarters of this year compared to last. And it’s following in the footsteps of Meta, Apple, and Alphabet by investing in multiple experimental projects to see what sticks.

Block recently acquired buy now pay later firm Afterpay for US$29 billion. Afterpay itself was only listed on the ASX in 2016 with a $165 million market cap. Dorsey’s master plan is to create a tech conglomerate, with the Square payment app, Afterpay, peer-to-peer payment service Cashapp, music streamer Tidal, and crypto developer TBD54566975 working together to generate symbiotic returns.

9) Altium (ASX: ALU) is a software company that provides PC-based electronics design software to engineers who design printed circuit boards (PCBs). At $34 a share and with a $4.5 billion market cap, Altium is has fallen since its $41 record last month. However, its 5-year Return on Capital Employed is an impressive 22.7%. Moreover, it projects FY22 revenue growth of between 16% and 20% to between US$209 million to US$217 million.

Management is so confident of its growth prospects that Altium rejected a $38.50 per share buyout bid from Autodesk in June as ‘significantly undervalued.’ At the time, this represented a 41% premium to the stock’s closing price. The company’s Altium 365 platform already has more than 17,000 active users and 7,000 active accounts, and management plans to pursue market dominance in this niche computing area. Long-term, Altium could be to PCBs as Arm is to semiconductors.

10) Nitro Software (ASX: NTO) has fallen to $1.78 a share, less than half its record $3.88 in November. The $400 million company’s Nitro Productivity Suite provides e-signature tools and integrated PDF support to customers. Encouragingly, Goldman Sachs believes Nitro has a Total Addressable Market of US$34 billion and has put a 12-month price target of $2.95 on the stock.

In Q4 results, it reported a revenue increase of 26% year-over-year to $72 million and added Deutsche Bank to its client list amongst others. Golman Sachs believes that ‘Nitro operates in large, underpenetrated markets supported by structural growth tailwinds including remote work, enterprise digitisation, and e-signing adoption.’ While the mass uptake of e-signatures may take time, this ASX growth stock has long-term investment potential.

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Charles Archer | Financial Writer, London
21 February 2022