Jumpy markets and below trend growth are on the cards this year, says James Thomson, fund manager, Rathbone Global Opportunities Fund.
As we exit the period of zero rates, all of the ingredients are there for a ‘kangaroo’ market whose dizzying bounces will probably keep short-term investors on the sidelines as they wait for an ‘all clear’ signal. That will never come and often the best returns come when you least expect them.
Growth stocks do well when widespread economic growth is hard to find and as it takes about 18 months for the effect of all those rate rises to hit the real economy, we’re undoubtedly in for a period of below trend growth. But I’m not sure about a recession.
While economists and strategists are almost universally bearish, their year-end targets reflected continuing bearishness that makes for an interesting contrarian signal.
We see positive signals that might justify the better-than-expected performance of the market. Many components of inflation have rolled over sharply.
With this divergent outlook, we have built in the balance to withstand frequent market tantrums and a variety of economic scenarios but ultimately you have to believe in high quality growth equity investing.
We believe a soft landing is a possibility, but now is not the time for one-way bets.
In 2022 we sold many of our earlier-stage growth companies, which were built for a different world where investors rewarded ‘land grab’ growth fuelled by the low cost of capital. We switched into larger, more profitable businesses that are more resilient and have recurring revenue growth. That’s because we believe that, in a world of deteriorating or stalling economic growth in real terms, the strong will get stronger. During the big sell-off last year, we added Apple, LVMH, Formula One, and Schneider Electric. More recently we’ve bought Compass, Monster Beverage and Walmart and significantly increased our holding in Amazon.
Our weatherproof stocks – companies with more resilience, less growth, and staple-like demand make up more than 20% of the portfolio. Names that have been added include companies like Coke, Heineken, McDonalds and chocolate and cookie maker Mondelez. Not only a tour of my personal diet but some of the most profitable and resilient brands in the world. These sit alongside garbage collection and pest control companies that provide staple like recession resistant services.
All foils to the pro-growth part of the portfolio which include retail legends like Home Depot, Costco and TKMaxx. Some of the best machinery and industrial companies like Deere and a rarely mentioned business called Amphenol which has quietly and consistently been one of our best performers over many years. And of course, the familiar home of the growth investor – technology companies including Microsoft, Google, and 2023’s star performer Nvidia.
Despite the headwinds, the risks and the appeal of risk-free cash returns, I believe equity investors will be rewarded. Much pain has been front-end-loaded, and we shouldn’t discount a soft landing and the adaptability of some of the best businesses in the world.
We remain fully invested and the comfort of having a five-year view should provide enough of a cushion to protect against any bumps along the way.
