Investors should get used to inconsistency over the next few years as the world remains in a low growth state, according to James Thomson, manager of the Rathbone Global Opportunities fund. 
As readers will be aware, economic growth around the world has been lacklustre in recent years and FE Alpha Manager Thomson says this is something people need to get used to.
“We’re growing slowly – pretty close to stall speed,” he said. “If anything I see downside risk to economic growth.”
Despite this slow growth, markets have performed well over the last three years, with the MSCI World index rising 43.41 per cent during the period.
Performance of index over 3yrs
Source: FE Analytics
This has been driven predominantly by growth stocks, with investors looking to add high quality defensive stocks during times of economic uncertainty.
“When the economy is growing below trend, when growth around the world is hard to come by, it is precisely the growth stocks that are most highly valued and that is why you’ve seen valuations go up and up for some of the growth names, because it is so far to find it elsewhere,” Thomson said.
Performance of growth vs value over 3yrs
Source: FE Analytics
As the above graph shows, over three years global growth stocks has outperformed value stocks by 13.75 percentage points, with investors putting added emphasis on those parts of the market that can grow above trend.
This has, however, led to stretched valuations, with many suggesting that companies such as Facebook and Amazon in the US, now valued on price to earnings multiples of above 20, are too expensive.
“No one is expecting a growth boom around the corner for the economy so during this time of below trend growth these are exactly the sorts of companies that investors should embrace and that’s why valuations have gone up for these names,” he said.
Valuations, he says, are one of the biggest pushbacks he has from investors and analysts, but Thomson remains undeterred by the high prices.
“My point is usually you worry about high valuations that are associated with investor euphoria, that are associated with irrational exuberance. That is where you worry about high valuations being reflective of a reality that isn’t going to come through.”
“The reality at the moment is, although valuations seem high, investor sentiment is near five-year lows, so in my mind that doesn’t point to euphoria.”
“That doesn’t confirm that valuations are the canary in the coalmine so I don’t think that is a great indicator for investors.”
However, he says valuations are “keeping a lot of investors on the side lines where maybe it shouldn’t”.
“That is why I feel that even though I’m getting those sort of comments thrown in my face, when I go out and see companies and analysts my overarching feeling is I’ve never had so many buy ideas,” he said.
“Despite the criticism that are out there, despite the confusion that is out there, I am not short of ideas, I’m short of cash.”
Instead of valuations, Thomson says the biggest risks to his fund is a return to global growth, which would boost unloved, cyclical companies, an area he does not invest in his Rathbone Global Opportunities fund.
“The biggest risk to this fund is actually a resurgence in global growth because in that instance would be the dogs that start barking again.”
“All of the low growth companies will benefit because the tide will be going in their favour so actually I think that is the greatest risk but I don’t see that coming round.”
With this being unlikely to occur, he warns that investors should get used to inconsistency in the market for some time to come, with ‘air pockets’ of sentiment making certain areas of the market surge and fall.
“I see inconsistent performance for fund managers, for me, for investors,” he said.
An example of this is the emerging markets, an area which Thomson does not invest in. The market had been lagging in the two years prior to 2016 due to concerns over a slowdown in China and the probability of the Federal Reserve raising interest rates in the US.
This has eased somewhat however and as the below graph shows, emerging markets have come back into favour in 2016.
Performance of index over 3yrs
Source: FE Analytics
They have risen 32.92 per cent so far this year, as Brexit concerns as well as the lack of Fed rate hikes and easing of concerns over China have improved investor sentiment.
“Inconsistent performance means that you’ll have periods of wonderful performance and then you’ll have periods in the doldrums, and part of that will be this savage sector and country rotation that you get in an increasingly frequent pace where certain parts of the markets are heavily in favour only to fall out of favour a short time later,” Thomson said.
“So that feels right – when you’re growing slowly loyalties die quickly and people churn to the next thing that has its day in the sun and it moves onto something else.”
His own fund has followed this pattern, having been a top quartile performer last year, in part thanks to the rise in the large American stocks, it has been below average in 2016.
This can be attributed to his lack of exposure to the aforementioned emerging markets, but over three years the fund is a top quartile performer, returning 53.84 per cent to investors, as the below graph shows.
Performance of fund over 3yrs
Source: FE Analytics
“Inconsistent performance is probably something we’re going to have to live with over the next few years with the world growing slowly,” Thomson said.
However, he adds that investors can still make good returns, as long as they are “backing the right horse in these periods of turmoil”.
“It’s a funny world because in amongst all that turmoil there are companies that are really changing things and they’re the ones that will really benefit from this,” he said.