James Thomson, manager of the Rathbone Global Opportunities Fund:
Welcome back to a world of unreliable growth.
The global economy was hit by the summer surge in COVID, and some inflationary pressures look persistent. But a modest pullback from peak growth does not mean that a deep slowdown is imminent. We think that the economy and stock market could well stay skittish, while grinding higher because the employment picture is so healthy, inventories are low, consumer savings are high, and capex has still not caught up with demand.
That said, investor sentiment has certainly got more fragile as we’ve hit many economic, monetary policy and political inflection points. This has caused abrupt changes in market leadership and amplified stock market moves. Investors keep churning between reflation, stagflation and resilient growth stocks, with alarming inconsistency. Factor and style shifts blaze up quickly and then burn themselves out. Many companies have suffered recently as rising operating costs, product shortages and delays have crimped demand. As we go into 2022, we’ll still be in a world of unreliable growth, but believe the worst of the supply chain disruptions will be behind us and the bar lowered in terms of earnings expectations. For those companies with pricing power, recent surveys indicate plans to increase prices by significantly more than they plan to further raise wages. If these price rises stick and sales volumes remain robust, this could deliver some explosive earnings upside even though the journey toward them will be bumpy.
Our key exposure is to the US because that’s where the growth is. US companies are growing profits more than 4x faster than the rest of the developed world and many of those competitive advantages are permanent.
Many of these growth stocks in the US deliver higher top line revenue growth, but it’s resilient and much less sensitive to changes in economic growth. Often these businesses have high levels of recurring revenues – long-term repeatable, subscription like cashflows, housed within asset-light shells. Where the intrinsic value of the business is built on high confidence in decades of sustainable growth – long duration assets.
Growth investing does well when widespread reliable economic growth is hard to find. Some 20 years ago almost half of the S&P 500 was growing their revenues consistently more than 15% a year. Today only 70 companies out of 500 are doing that. That means returns could be concentrated in just a handful of companies that are providing that growth and most of them live in the US.
