This has been the worst start to a financial year since 1928, the year prior to the largest stock market crash of all time, according to Rathbone’s James Thomson.
The FE Alpha Manager, who runs the four crown-rated Rathbone Global Opportunities fund, says that markets have been hit by waves of bearishness already due to the continuation of tumbling oil and commodity prices and concerns surrounding China’s economy.
Performance of indices in 2016
Source: FE Analytics
However, he says that this isn’t necessarily a bad thing for investors, and that he is seeing more attractive investments opportunities now than he has done throughout his entire career. 
“The silver lining of [the market being akin to 1928] is that later in the year the market went up 30 per cent,” Thomson (pictured) pointed out.
“The bad news is that 1929 came, so let’s hope we don’t get a repeat of that. But it proves that, even though at the start of the year it may all seem terribly bearish, you can actually get a good result by the end of it.”
“Investors just seem to be nervous and confused, and I guess one of the big issues is oil. I’ve got almost zero exposure to oil in the fund, but it is having a wider impact, and this keys into China as well.”
For a number of years, the manager has held almost a zero per cent weighting in utilities, banks and emerging markets as well as oil & gas, which he says were the four worst-performing areas of the market last year.
This contributed significantly to his top-decile performance during last year’s rocky market, and he says that his bearishness towards these sectors should continue to benefit investors while nerves surrounding the oil price remain priced into the market.
“Last year was probably our best year in terms of relative outperformance, but it surprised me because one of the biggest reasons was the things we didn’t own,” he admitted.
“The flipside of that is it’s now our biggest risk. When you get such marked underperformance from certain parts of the market invariably you will have a snap-back, and that snap-back will come, I just don’t know when it’s going to be.”
“I’m having to communicate pretty clearly to clients that it will come, we won’t be present in those areas in any meaningful way and so we will underperform. But those are sectors that we haven’t liked for a very long period of time, either because we don’t think we have the expertise to invest there, we don’t like the growth qualities that exist there, or philosophically they just don’t meet our requirements.”
So far this year though, investor sentiment towards the oil & gas sector has been poor. In fact, Thomson points out that Goldman Sachs’ latest oil price forecast was just $20 per barrel.
The manager’s research has found that neutral investor sentiment is now at a 15-year high, and he believes this to be a proxy for confusion in the market. He adds that bullish sentiment is currently at its lowest level in more than a decade.
While this information is likely to be a cause for concern among many, Thomson argues that this could be a good sign for markets, as investors are becoming too bearish and any positive surprise at this point will be bullish for markets.
“Earnings estimates have come down already, economic and growth estimates have come down already. Any upside to that would be a very positive sign for markets and investors aren’t positioned for it, so I think if anything, there’s the potential for a positive surprise coming through as a result of that,” he pointed out.
“I still stay more on the positive tack, based on how the markets are overwhelmingly positioned. But just to be safe, I still want to stay out of the most exposed areas. Oil & gas, mining, materials, a lot of industrial companies. Without question it’s going to be a rocky ride so I want to avoid those areas.”
Instead, the manager has significant exposure to technology companies, consumer-facing companies, and retail across the value, specialist and online areas of the market.
Some of his favourite stocks at the moment, which significantly contributed to his fund’s strong performance last year, include Amazon, Rightmove and Betfair.
Performance of UK stocks since 2015
Source: FE Analytics
“Those are the areas I’m continuing to back this year and I think they will come through,” Thomson continued.
“Negative headlines don’t help market sentiment, but again I think it all goes to prove that investors are very confused about where we are, and that confusion is coming through in the numbers. That feeds the bearishness that now sets the bar quite low.”
“What stands out to me is that I think it’s quite hard for us to go into a recession with indicators looking as they are at the moment. The unemployment rates and consumer confidence in developed markets look good, and I think it’s very hard for us to have a recession with these two indicators heading in the right direction.”
The manager explains that consumer spending is not only closely linked to employment rates, it is likely to be improved through the oil price drop in developed markets. As such, he is currently seeing the best opportunities in the US, the UK and Europe. Only 1.97 per cent of his fund (other than its 2 per cent cash weighting) is invested elsewhere, and is currently in Asia Pacific stocks.
“What does the US consumer do a lot? They drive and eat, and both food and energy prices have fallen a lot, so that is helpful for disposable income trends in the US,” Thomson said. “We haven’t seen a wave of spending yet but again, that may be good news to come down the road.”
“I continue on the tack of being more bullish towards the consumer, and then I stick to a long term mantra which is that I like companies that are growing quickly, where earnings are better than expected. I believe that this tends to lead to outperformance and we’ve seen evidence of plenty of companies that are delivering positive earnings surprises.”
Another distinguishing feature of the manager’s investment process is that he won’t hesitate when selling stocks that aren’t reaching the anticipated levels of growth. However, he adds that it’s important to ascertain whether the stock is enduring a short-term blip or a longer term “canary in a coal mine”.
“In fact, I can rarely think of a time in my entire career where I’ve had so many good ideas waiting for a place. We have a very exciting watch list of companies, many of which are ready to go now. We’re just waiting for space to open up in the fund.”
“It’s also interesting because while these waves of bearishness are sweeping over the whole market, we’re now saying this is the best time in our career for buying ideas. We’re not short of ideas, we don’t think we’re about to fall off a cliff. Our operational tempo is the highest it’s ever been.”
Rathbone Global Opportunities has provided top-decile total returns over one, three, five and 10 years. Its most significant outperformance has occurred over the longer term though, having more than doubled the performance of its peer average in the IA Global sector over the last decade.
Performance of fund versus sector and index under Thomson
Source: FE Analytics
The £674m fund has a clean ongoing charges figure of 0.79 per cent.
