Stock markets around the world have hit all-time highs this year and even though most areas – especially the mighty US – began to cool off last month, worries about irrational exuberance and toppy valuations abound.
Against that backdrop, James Thomson, manager of Rathbone Global Opportunities, expects a “rollercoaster” ride in the coming months as optimistic investor positioning runs into the reality of company results.
“Many investors have already positioned themselves for good news so even when a company beats analysts’ consensus forecasts the stock can still go down. It’s usually the best performers that get hit by profit-taking on this ‘sell the news’ phenomenon,” he explained.
Despite US equities being priced for perfection, Thomson does not think valuations are in bubble territory.
“While many investors recoil at US valuations, we counsel that expensive does not always mean overvalued. In fact, when you assess US valuations in the context of their growth potential, resilience and the protected profile of future growth, we still think the US market provides some of the most attractive opportunities to make money over the long term,” he said.
The US stock market was propelled to giddy heights by the ‘Magnificent Seven’ mega-cap tech stocks last year, when artificial intelligence (AI) was the main game in town, prompting talk of an AI bubble. That dynamic is starting to unwind this year, with some of the seven, most notably Tesla and Apple, slipping from their perch.
Terry Smith, manager of Fundsmith Equity, said: “The most obvious areas for worry are the stocks which have been driven by the AI hype. We have yet to see any clear revenue models for generative AI let alone a clear path to profits and returns on the considerable investments.”
Smith is also concerned about the prospects of further rate hikes from the US Federal Reserve and the chaos that might unleash in financial markets.
JPMorgan boss Jamie Dimon said in his annual letter to shareholders last month that the bank was preparing for interest rates to be anywhere between 2% and 8% or even higher. Persistent inflationary pressures and high government spending could compel the Fed to hike rates, he suggested.
Smith warned: “If Jamie Dimon were to be proved right about the risk of rate rises driven by the US budget deficit and the end of quantitative easing, then we could see a more general sell-off in anything highly rated, like we did in 2022.”
The future is by no means bright or certain, therefore. In fact, according to Thomson, “global equity markets are suffering from a scarcity of certainty”.
“I think investment returns will be lower in the years ahead and more inconsistent, but that doesn’t mean you shouldn’t invest,” he added.
Rathbones is staying balanced across a variety of sectors. “We think nimble stock-picking amongst industry champions and overlooked growth stocks should provide significant outperformance for our active approach – albeit with the chance of increased short-term volatility,” Thomson explained.
For Wellington Management, a rollercoaster ride in global equity markets is nothing to be scared of and indeed, short-term volatility provides a chance to rebalance the portfolio.
Yolanda Courtines, who manages Wellington Global Stewards, said: “Market volatility presents opportunities for us to trim our outperforming positions with expanding valuation multiples and lean into companies where the valuation has been compressed.
“This construction philosophy was particularly effective in 2022 when we leaned into positions within financials where valuations multiples had fallen through 2021. The portfolio then significantly outperformed in 2022, partly driven by the financials businesses which benefited from the rising rate environment and the market reengaging with the stocks.”
Courtines and co-manager Mark Mandel aim to hold companies for 10 years or more so the current market environment does not influence whether they buy or sell a stock. Instead, they look for companies with a high return on capital and strong stewardship credentials.
“Our holdings typically have robust balance sheets, world-class management, engaged boards, a long-term orientation, proven capital allocation skill and a stakeholder mindset,” she said.
Like Wellington, GQG Partners focuses on bottom-up stock picking and looks beyond the present macroeconomic backdrop. Therefore Rajiv Jain, Brian Kersmanc and Sudarshan Murthy, who manage the GQG Partners Global Equity fund, said they are not concerned about bubbles in the equity market.
“We employ an adaptable process that is not incumbent upon strong performance in certain sectors, countries or factors for us to outperform,” they said.
The firm’s philosophy is to own a concentrated portfolio of high-quality businesses at reasonable prices that exhibit high visibility on earnings and potential headroom for growth over the next three to five years.
GQG’s global equity fund is overweight select companies within the technology, communication services and energy sectors. Recently, Jain, Kersmanc and Murthy have also been investing in utilities.
Thomson, Smith, Courtines, Mandel and the GQG trio have all been nominated for the FE fundinfo Alpha Manager awards in the global equity category, alongside Royal London Asset Management’s Mike Fox. The winner will be announced on 14 May 2024.