Global investors should brace themselves for a volatile and irrational ‘Whack-A-Mole’ market environment as we head into 2017, according to Rathbone’s James Thomson (pictured). 
The FE Alpha Manager, who heads up the four crown-rated Rathbone Global Opportunities fund, warns that some areas of the market have reacted hastily to the election of Donald Trump as president, given that slowing global growth is still a market risk.
He adds that, as the president-elect’s proposed policies change and new ones are introduced, market volatility is likely to increase, which could exacerbate any pain felt in value and recovery stocks.
“I guess the way I would describe 2017 with Trump in charge is a little like ‘Whack-A-Mole’ markets where you get new Trump policies and tweaks that keep popping up and creating even more volatility for 2017,” Thomson said.
“I think it will be a tricky year but the economic data is still supportive and a lot of Trump’s policies are reflationary, very pro-growth and very pro-business. He wants to lower personal and corporate taxes by a massive $200bn per year, those tax cuts tend to get spent so that should be good for consumer plays.”
“Trump has also talked about cutting huge swathes of federal regulations and red tape and offering a potential break on repatriating foreign profits back to the US, which would potentially be $2.5trn of stranded cash that could be coming back to shareholders or being used for M&A.”
“I think that’s all positive for markets. What the market has done in response to this has been a fairly brutal rotation out of companies that are offering earnings reliability and into companies that are offering earnings recovery. That has been the big shift in markets over the last six weeks.”
Performance of indices over 6weeks
Source: FE Analytics
During the first six months of the year, many investors piled into high-quality, dividend-paying ‘stalwart’ stocks due to geopolitical uncertainty and an increased hunt for income.
Now though, given that rising inflation could bruise fixed income markets and cause bond yields to rise, many investors have turned their backs on so-called ‘bond proxies’.
Not only this, investors are expecting a global inflationary boost to benefit the global economy and provide a tailwind for value stocks.
“I think the view is that the weakest corporations are going to be bailed out by the coming growth boom and investors are really hunting around for the greatest leverage for that trade, so we’ve seen a sharp rally in mining, oil & gas, infrastructure and bank stocks over the last month,” Thomson continued.
“The consumer, technology and staples sectors have fallen in popularity, even though those are the ones that tend to offer the most dependable earnings.”
“That’s been a big shift and I’m wary of chasing that rally because I’m cognisant of the fact that many of Trump’s policies may not get enacted. If you look at the Republicans in the Senate, they tend to have a rebellious streak and a lot of the legislation and repeal that Trump wants to enact requires more than a simple majority.”
“The Republicans only have 52 members in the Senate and, actually, many of these policies will require at least 60 votes, so they’re going to need Democrats across the aisle.”
Another reason that investors shouldn’t become too complacent about Trump’s fiscal spending, according to the manager, is that Republicans tend to be fiscally conservative, which means any large government spending programmes could be more muted than originally expected.
“Barak Obama tried to increase the debt ceiling and there was a big backlash from Republicans. If you look at Trump’s planned spending spree, that would triple the deficit, so I think that would require a pretty monstrous U-turn from those same senators,” he reasoned.
“You actually may get a bit of a pushback on these bullish infrastructure spending plans. My sense is a lot of sectors have gone a bit too far and they might come crashing back down to earth when reality strikes and some of that infrastructure spending is not going to come through.
“I think we need to stick to our knitting. We prefer more reliable and sustainable growth companies and I think that will be well set for 2017.”
While Thomson is predominantly a bottom-up stock-picker, overarching themes he is currently focusing on in his portfolio include health & wellbeing, the rise of the gaming industry and internet giants.
As such, some of his largest holdings include the likes of Amazon, Tencent, Facebook and Visa. While some of these stocks have come under fire for trading on historically high valuations, the manager believes that many high-quality growth companies have much further to run.
“I think this is the most hated rally in history and that’s really evidenced by the fact that bullish sentiment is close to 20-year lows and yet we keep hitting new highs,” he explained.
Performance of indices since start of FE data
Source: FE Analytics
“I think that’s a very interesting dichotomy the market is trying to digest. What that says to me is I don’t think valuations are stretched. Typically, when valuations are stretched, that is also matched with bullish sentiment but we’re not there. Investor sentiment is in the toilet.”
“I struggle to believe we’re in this period of euphoria and irrational exuberance when sentiment is near 20-year lows. I am still positive, my watch list is bursting with ideas, but I am cognisant of the fact we are in this Whack-A-Mole market where Trump will keep coming up with these new policies and new little tweaks that can create volatility, and that could be a frustrating feature of 2017.”
Thomson’s £874m Rathbone Global Opportunities fund has achieved top-quartile total returns during six out of the last 10 years and above-average returns during eight of the last 10 years compared to its sector average.
However, the fund has fallen into the bottom quartile year-to-date, having returned 14.36 per cent compared to its average peer’s return of 21.01 per cent and its FTSE World benchmark’s return of 27.57 per cent.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
The manager attributes this to his aversion to value stocks and his lack of exposure to sectors such as oil & gas, infrastructure and mining.
“We have to try and be more long term about these things and, where it is possible, avoid getting in Trump’s crosshairs. But, for the most part, the types of businesses I hold in the portfolio will be able to thrive,” he added.