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The Iran war raises the possibility of a prolonged energy shock. Approximately 25 percent of the world’s seaborne oil trade and 20 percent of the global liquefied natural gas trade flows through the Strait of Hormuz, making it one of the world’s most important energy chokepoints.1 A sustained disruption could ripple through global supply chains for energy, fertilizer, food, and other critical inputs.
Markets and news are moving quickly, and outcomes remain deeply uncertain. Rather than attempt to forecast geopolitical developments, we focus on what we know.
Even before the Iran war began, valuations across many structural growth businesses had already compressed to historically attractive levels relative to broader equity indexes. At the same time, our portfolios have evolved meaningfully since the 2021 to 2022 cycle, with greater emphasis on profitability, balance sheet strength, and durable competitive advantages.
If an energy shock constrains economic growth and cyclical earnings, investors may again seek out the types of durable growth businesses we focus on.
- Outcomes from the Iran war span a wide range. Continued disruption to the Strait of Hormuz could create significant supply shocks across energy and other critical inputs.
- Markets and news are moving rapidly. No long-only portfolio is immune to a broad risk-off environment if the worst-case scenario unfolds.
- Valuations for many structural growth businesses had already compressed to attractive levels before the Iran war began. If higher energy prices constrain economic growth and cyclical earnings, investors may once again gravitate toward companies with durable secular growth prospects.
A Different Portfolio Than the Last Cycle
The experience of the 2021 to 2022 period remains fresh in investors’ minds.
During that time, rapidly rising inflation and aggressive monetary tightening created one of the most difficult environments for growth equities in decades. Elevated starting valuations and the presence of many early-stage companies with distant profit expectations amplified the impact.
Our portfolios today are meaningfully different.
Over the past several years, we have increased our emphasis on businesses that demonstrate strong profitability, durable competitive advantages, and resilient balance sheets. Exposure to companies that depend heavily on distant or uncertain profit streams has declined.
The result is a collection of businesses that we believe is higher quality and more resilient across a range of macroeconomic environments.
A Curious Moment in Market Psychology
The current valuation backdrop reflects an unusual tension in investor sentiment.
AI has captured enormous attention. A small group of highly visible beneficiaries has attracted significant investor enthusiasm and valuation expansion.
Outside of those companies, however, many growth businesses appear to be caught in what might be described as terminal value purgatory. Investors seem reluctant to assign long-term value to these companies out of concern that artificial intelligence could eventually disrupt their business models.
In other words, markets appear increasingly focused on hypothetical disruption risks that may unfold many years in the future.
At the same time, many cyclical sectors face the possibility of more immediate economic pressure. Higher energy prices, rising input costs, and slowing economic activity could affect earnings across industries represented in broad equity benchmarks.
This contrast between perceived and immediate risks is striking.
Valuation Starting Points Matter
Perhaps the most important implication of this dynamic is the current valuation starting point.
Even before the Iran war began, valuations across many structural growth businesses had already compressed significantly. Today, our flagship portfolios trade at their lowest absolute and relative valuations in years, with PEG ratios more attractive than their benchmarks.
In practical terms, investors are paying far less of a premium for companies that we believe possess stronger structural growth prospects, higher returns on capital, and more durable competitive advantages than what’s available passively.
This starting point may prove particularly important if the Iran war leads to persistently higher energy prices. In an environment where energy shocks may constrain growth across large parts of the global economy, durable growth businesses trading at historically attractive valuations may tilt the long-term odds in favor of patient investors.
1 https://www.iea.org/about/oil-security-and-emergency-response/strait-of-hormuz
Disclosures:
The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change.
“Flagship portfolios” defined as Select Growth, Global Growth, Emerging Markets Growth, Global Leaders, International Growth, International Leaders, and Technology Innovators. “Lowest absolute and relative valuations” refers to the next twelve month price-to-earnings ratio. “PEG” refers to the price/earnings-to-growth ratio using next twelve month price-to-earnings and the weighted average of FY2 and FY3 earnings estimates. This enables the comparison of companies with different fiscal year ends and smooths the effect of near-term distortion.
This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements. All investments are subject to market risk, including the possible loss of principal. Recent tariff announcements may add to this risk, creating additional economic uncertainty and potentially affecting the value of certain investments. Tariffs can impact various sectors differently, leading to changes in market dynamics and investment performance. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results.