Why this fund manager is backing Xero shares for the rest of 2022

Rising interest rates have seen most growth stocks sell off this year.

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Xero Limited (ASX: XRO) shares have come under pressure this calendar year amid the outlook for significantly higher interest rates ahead.

Since the opening bell on 4 January, the Xero share price has tumbled 41.2%.

But it’s not just Xero shares under pressure.

The RBA followed in the footsteps of the US Federal Reserve and raised the official cash rate for the first time in a decade earlier this month. And both the RBA, the Fed and numerous other central banks across the world have flagged a raft of further rate rises ahead.

This has seen equity markets retrace in 2022, with growth shares – like tech shares priced with future earnings in mind – taking some of the biggest hits.

For example, while the S&P/ASX 200 Index (ASX: XJO) has lost 6.4% so far this year, the S&P/ASX All Technology Index (ASX: XTX) is down 32.2%.

So, is it game over for growth stocks like Xero shares?

Not by a longshot, according to Ben Clark, portfolio manager over at TMS Capital.

Invest in good businesses, not the latest trends

Speaking to Livewire, Clark said, “We are big believers that if you own good businesses, you want to try and stick with them, particularly through these really erratic cycles and not try and chase the latest trends in the market.”

With interest rates rising and bond yields falling, Clark tipped Xero shares as the ones he’d hold for the rest of the year if he were limited to a single option.

“Well, I’m going to say Xero,” he said, noting the steep fall in the Xero share price so far this year.

Clark continued:

I think where you want to look is good quality businesses again… Most fundies would regard it as one of the highest quality businesses on the exchange. But it’s been very expensive, and it’s just got significantly cheaper.

On face value, it still looks expensive, mainly because they pump about 80% of their revenue back into investment.

Clark believes “the bond market has overshot itself” in its interest rate expectations. And he thinks we’ll “see bond yields come off, and see parts of the market that have been hit by that start to move again”.

As for Xero shares, he added, “That’s the business that is at the tipping point of the overshoot that I’m talking about, that could run hard if we start to see that play out.”

How have Xero shares been tracking?

While Xero shares have been hammered this calendar year, they’re still up 297% over the past five years. Which goes a long way to supporting the “time in the market not timing the market” is what matters for returns mantra.

Over the past five years, the ASX 200 itself has gained 24%.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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