With investors and managers looking for pockets of growth in a slowing world, Rathbone’s James Thomson says he has never had so many buy ideas. 
“Despite the confusion that is out there, I am not short of ideas, I’m short of cash,” the manager of the Rathbone Global Opportunities fund said.
Equities have been rising around the world as investors have been forced into buying ‘riskier’ assets thanks, in part, to loose monetary policies and low interest rates forcing investors out of bonds and towards equities.
As the graph below shows, bonds have risen to near-record highs, teetering on the verge of negative yields, while equities have steadily risen.
Performance of indices in 2016
Source: FE Analytics
Equities have risen 19.45 per cent globally, with particular strength in the emerging markets as investors move away from more developed markets due to uncertainties including the Brexit vote and the US elections.
Meanwhile, within the developed world growth remains popular, with investors looking at in demand, but also highly priced, defensive stocks.
While many see this environment as difficult for bottom-up stock pickers such as Thomson (pictured), he says that he has “never had so many buy ideas”.
“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 added.
Below he outlines the sectors and stocks he has recently bought into and those that he is keeping a close eye on moving into 2017.
Technology
One of the best areas to find growth is in the technology space, Thomson says, with the US and continental Europe offering some intriguing opportunities.
“There’s some tech companies that are very different beasts to what they were,” Thomson said.
Within this, he says video game companies such as Activision Blizzard and Electronic Arts have changed, having previously been un-investable.
“It was really a horror show of volatile earnings streams driven by hits or misses, delays to development and the console cycle,” he said.
“That has all changed these are very large businesses, they’re mature, they have very significant number of titles and a very loyal fan base.”
“The industry is also changing in that you don’t really buy video games in retailers anymore, a lot of people particularly younger people download them so you are cutting out the retailer’s margin and that’s going to the publisher instead.”
This has been coupled with the introduction of in-game purchasing, something millennials appear to be particularly comfortable with, as well as advertising revenue becoming more prominent, particularly in free-to-play mobile games.
“If you think about a game like Candy Crush that is played by 400m people every month – 96 per cent of them don’t pay a penny to play it. Those days are over.”
“Activision is going to start introducing advertising into that model. If you want to keep playing you have to listen to this ad. If they get that right without causing what they call atrophy of their players that potentially could double the size of the company.”
Performance of stock in 2016
Source: Google Finance
Activision has been performing well this year, as the above graph shows, climbing 14.21 per cent while fellow games producer Electronic Arts (EA) has risen 22.61 per cent so far in 2016.
Consumer stocks
Being a bottom-up stock picker, there are some stocks that break the mould such as some of the consumer stocks Thomson has been buying.
The three examples he gives of consumer companies poised for growth are plastic braces (for teeth) maker Align, cosmetics retailer Ulta and food producer Kerry.
“[Align is] the best play on 3D printing in the world as all of these trays are made using 3D printer technology,” he said.
This gives it a strategic advantage within the industry as the braces are (relatively) cheap to make and he says the company is gaining popularity globally, particularly in Asia where it is being used in some complex cases.
Turning to Ulta, Thomson says the company is in the US but has a business model that could work abroad such as in the UK and China as well.
It works as a “one-stop shop for cosmetics” and has been growing at 20 to 30 per cent annually. “It is the fastest growing cosmetics retailer in the world,” he said.
Finally, Kerry is a business that designs new recipes for food and beverage companies, with one of its most recent successes being the launch of the Caramel Sutra ice cream for the Ben & Jerry’s brand owned by Unilever.
However it is also working on reducing salt and sugar contents of food, which Thomson believes could lead to global recognition in the coming years.
Financial services
Another area he has been keen on in recent months is financial services, an area that divides opinion among many investors.
As the below graph shows, the banking sector has lagged markets since the financial crisis in 2008, returning 68.03 per cent compared to the wider market’s 135.55 per cent return.
Performance of indices since 2009
Source: FE Analytics
“I think you can attribute the problems in the banking sector really to two words: chasing growth,” he said.
“That’s what banks have been doing for the last decade and I think that’s the causes of the problems in the banking sector.”
“The pressure from the shareholder to the management team is to grow and that gets filtered all the way down to the low level employees and actually this is an industry that should not be pressured to grow.”
“This is an industry that should be managed for risk and so I’ve found two banks really in the whole world that have adopted that mantra and that’s First Republic and Svenska Handelsbanken.”