The economic recovery in the West has contributed to the underperformance of emerging market equities as well, with investors having good reason to keep their money closer to home.
Performance of indices over 3yrs
Source: FE Analytics
However, the majority of experts believe that the January sell-off was sparked by the emerging markets turmoil and many of them, such as Psigma’s Tom Becket, say that if the outlook continues to deteriorate in the developing world then it will de-rail the rally and economic recovery in the UK and the US.
Thomson (pictured), manager of the Rathbone Global Opportunities fund, isn’t concerned.
“I’m still bullish, though I recognise that investor sentiment is fragile and we saw just how fragile it was in January,” he said.“I think the emerging markets slowdown is a gift to the US.”
“I see it as a virtuous circle in many respects. The improving economy in the States is pushing Treasury yields higher, which is putting pressure on emerging markets, which is in turn pushing up their sovereign bond yields.”
“That is slowing growth because they now have a higher cost of capital, which is translating into weaker commodity prices as there is now less demand. The lower commodity prices, in turn, are putting more money into the wallet of the US consumer.”
“Last year proved that you don’t need emerging markets to perform well for stock markets to push north.”
“Clearly the antithesis of this argument is if growth in the emerging markets improves, because that will lead to higher commodity prices, which could break the US’s recovery. But I don’t think that is going to happen,” he added.
The manager isn’t getting carried away, however. He says that if the economic slowdown in emerging markets were to cause a financial crisis, then that would have severe implications for the global economy, though like a lot of market commentators, he thinks this is a very unlikely scenario.
“Yes, if a financial crash were to happen in the emerging markets that would have a detrimental impact on the developed market recovery.”
“However, we are seeing a re-balancing – or slower growth – in those economies. This isn’t an edge-of-the-cliff moment,” he added.
Given his thoughts on the developed market recovery, it isn’t a surprise to see that Thomson’s fund is more geared towards domestically focused stocks in the developed world.
North America makes up 60 per cent of his fund, for example, and he also holds UK consumer stocks such as ASOS, Rightmove and Associated British Foods [the owner of Primark].
Thomson’s £336m Rathbone Global Opportunities fund has been one of the best, and most consistent, performers in the IMA Global sector.
According to FE Analytics, it is the second-best performing portfolio in the sector over 10 years with returns of 218.42 per cent and has beaten its benchmark – the FTSE World Index – by close to 90 percentage points.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It also boasts top quartile returns over one, three and five years.
Rathbone Global Opportunities has only underperformed against the sector in two of the last 10 discrete calendar years, one of which was in 2008.
Thomson is one of the first to admit that his portfolio was too aggressive prior to the crash, which is why it fell by so much that year – 40 per cent.
However, the manager has since made sure that his portfolio is much more stable, by maintaining a core of quality defensive companies.
The manager has also kept a high level of cash in his fund since the crash, as much as 20 per cent of total assets. This contributed to the fund’s relative underperformance in 2012, a year in which markets rebounded.
However, his cash weighting has been coming down in recent times and is currently only a small proportion of the fund, which reflects the manager’s bullishness.
One of the major headwinds facing the rally, apart from the emerging markets slowdown, is the fact that companies have not yet been able to increase their earnings at a rate that supports their current share prices.
Thomson admits that until that earnings growth comes through, the rally will not feel real to a lot of people.
However, he is confident that as the economy improves it will feed through and make the corporate sector more profitable.
“I understand the concern. Last year, 75 per cent of the rally was because of P/E expansion. That is always uncomfortable when markets are driven by valuations as it doesn’t feel right, it is almost like a hoax,” he said.
“However, it is a harbinger of good things to come.”
“I think we will see better earnings growth, higher employment and companies investing for growth. That will be spurred on by the market as management will once again have the confidence to invest and plan for the next few years of growth.”
“A lot of companies are also having their hands forced because they need to meet expectations. Therefore I do think we will see the earnings growth, but if we don’t then there will be a pull-back in the market.”
“But, I don’t believe that will happen,” he added.
Rathbone Global Opportunities has an ongoing charges figure (OCF) of 1.55 per cent and requires a minimum investment of £1,000.
