Rathbones’ James Thomson has claimed he is getting excited about the amount of negativity in the market, as it means a lot of the bad news is already priced in and any surprise from here could drive the upside.
Removing the impact of currency movements, the MSCI World index is down 14.1% so far this year, and 11.7% since the end of March, due to fears of continued high inflation and a potential recession.
Performance of index (local currency) in 2022
Source: FE Analytics
Yet Thomson, who runs the £3.3bn Rathbone Global Opportunities fund, said that even if the global economy were to tip into a recession, the market would be unlikely to fall further as it has already taken the worst-case scenario for granted – which, conversely, gives him grounds to be optimistic.
“I guess what I'm excited about right now is that expectations are so low,” the FE fundinfo Alpha Manager said.
“Investor sentiment is at 30-year lows. Consumer sentiment is at multi-decade lows. The market has already priced in a 70% chance of a recession. We're at peak hawkishness from the Fed. We've gone from one rate rise this year to 10.”
Against such a negative backdrop, he said any positive news would be a surprise to the market.
“In ice hockey lingo, where is the puck going?” he continued. “Just think about a potential de-escalation in Ukraine. Think about China announcing an end to its zero-Covid policy by the end of the year and exiting lockdown. If just some things start to go right, you can really see significant potential upside.”
Much of the pessimism around the macro environment surrounds the high oil price, with fears that the recent spike could usher in an inflationary environment that lasts a decade, just as it did in 1973.
Yet Thomson claimed that with the war in Ukraine partly responsible for the rise, this year may have more in common with 1990 when Iraq invaded Kuwait.
“We had a period of an oil-price spike which led into higher inflation, but it only lasted for six months,” he said. “There was a supply-side response, then the market started to correct itself and equities took off.”
However, in a recent article on Trustnet, Jupiter’s Richard Buxton said environmental, social and governance (ESG) pressure has prevented investment in oil & gas infrastructure over the past decade, making it difficult to ramp up production.
Jacob de Tusch-Lec, manager of the Artemis Global Income fund, warned there were other reasons to be pessimistic, too.
“I wouldn't say this with hundreds of clients in front of me, but I think things are pretty screwed up,” he said.
“Policymakers have done a lot of stuff they haven't done before, and money printing has been allowed to run for a decade.
“Now we have supply-led inflation, which renders policymakers impotent, because what are they going to do? If they hike rates, it is not going to give us more freight capacity on the oceans.”
The manager added that the problem with high inflation is its unpredictability: if you knew it was going to be 8% forever, you would price it into your expectations.
However, he said that when people or businesses don’t know how much they will end up paying for transport or energy, for example, they charge a premium for their goods and services to compensate for unexpected costs. In this way, inflation becomes self-perpetuating and difficult to bring back under control.
“I have a feeling, and I could be terribly wrong, that this is the end of an era and it's not going to be in a straight line,” de Tusch-Lec continued. “We have very weak policymakers: they all pretend that they can control the economy, but I think they are almost as worried as we are.”
De Tusch-Lec and Thomson don’t disagree on everything. Thomson admitted the pendulum had swung too far in favour of growth investors in the 15 years to the start of 2022, but said the era of unprofitable, speculative tech was now over.
Performance of indices over 15yrs
Source: FE Analytics
He also said that we could be entering a “golden age” for many old-economy industries, which have underinvested in machinery and equipment over the past 20 years.
De Tusch-Lec added: “For the first time in decades, we're seeing pretty boring areas actually have pricing power.”
Yet Thomson said it would be wrong to claim that growth investing is dead, or to compare this year to 2000 when the dotcom bubble burst: back then, technology was 45.9% of the market, but only 23% of profits, whereas today it is 36% of the market and 32% of profits.
“A lot of these technology companies are deeply ingrained and mission-critical in our lives,” he added.
“Businesses like Microsoft and Adobe are the backbone of our corporate enterprises: they simply don't get paused or switched off, and they are on multiples in their teens. And that will give you some protection for the long term. So the idea that the long-duration nature of their revenue streams is coming to an end, I think is wrong.”