This sharp sell-off in growth stocks this week provides an ‘excellent buying opportunity’ as their longer-term outlook remains ‘compelling’, says Rathbones’ James Thomson.
US equities were marked down aggressively yesterday as rising bond yields reflected concerns about the prospect of inflation and rising interest rates, leading investors to switch out of riskier, higher valued stocks.
The tech-heavy Nasdaq was particularly hard hit, down 3.5%, as technology stocks bore the brunt of investor selling.
‘The market is worried that there is too much stimulus and liquidity and its going to overheat. We’re now seeing higher inflation expectations, which feeds into higher borrowing costs and lower multiples across the market,’ Citywire AA rated Thomson (pictured) said.
‘It’s hard to know where the short-term drawdown ends, but we still feel the outlook for growth stocks is compelling. On a five-year view this is an excellent buying opportunity.’
Thomson, who runs the £3.2bn Rathbone Global Opportunities fund, pointed to retail investors pushing up individual stock prices, such as the Redditors’ drive on GameStop, as another sign of excess liquidity.
He highlighted the extent of US stimulus, with the average family of four having received around $14,000 across stimulus cheques and child tax credits. This is despite around 80% of families having experienced no job risk during the pandemic and the population as a whole having built up around $2tn in excess savings.
‘It’s an enormous amount of money and it’s not been particularly well targeted,’ Thomson said.
‘[The rise of the retail investor] is a symptom of too much liquidity in the system trying to find a home. There was an element of revulsion against the status quo coming through in WallStreetBets and Reddit. A lot of it was to show the hedge funds, which have had a stranglehold on the stock market, the power of the masses.’
With around 80% of stock market volumes already driven by ‘trend-following machines’ controlling giant investment strategies, the recent retail frenzy around individual stock names may reflect the ‘new flashmob-driven nature of stock markets these days’, he said.
‘In moments like this, much like in February and March last year during the calamitous falls that we experienced then, you need to come back your roots and mine are a five year investment horizon and taking the noise out of the short-term,’ Thomson said.
‘Trying to be cute and reposition your portfolio for this is probably not the right thing to do- you’re going to end up getting whipsawed. Perhaps the best advice here if you really do have a long-term investment horizon is to do nothing. Try and embrace the structural trends that are happening over the next five years.’
The fund was a strong performer last year, up 31.3%, more than double the Investment Association global sector’s 15.3% average, as Thomson’s long-term focus on growth stocks paid off in spades.
Holdings in the likes of PayPal, up 110% last year, and Amazon and Ocado (OCDO), which rose 71% and 79%, respectively, were among the portfolio’s biggest contributors.
Thomson believes the drivers underpinning these names remain not only intact but stronger after the pandemic. He points to Ocado as a case in point.
‘Ocado is one of the best businesses in Britain and it was not just a pandemic winner, it is a permanent one. People who haven’t previously shopped online have been forced to and once they’ve experienced the convenience, the shift is permanent,’ he said.
‘Even after the shops reopened last year, ecommerce didn’t give back that growth, it kept increasing. The digital transformation we’re experiencing is unstoppable.’
Avoiding the ‘value gravy train’
Thomson has been dismissive of the longevity of the value rally that kicked in on the vaccination approval news in November. While he said in his 2020 commentary that he would not ‘jump aboard this value gravy train’, he has been pragmatic, adding ‘we’re not burying our heads in the sand either’.
The fund has lagged during the last three months, returning 5.8% against the peer group’s 10.9%, as value stocks outperformed.
He has rotated around 15% of the portfolio from some of the stay at home winners of last year into stocks positioned to benefit from the reflation or reopening trade over the ‘last couple of months’.
The new holdings comprise a number of industrial names that were hit during the pandemic, including Linde, a specialty industrial gases business, and engineering company SKF.
Thomson is also backing a retail spending boom as the economy reopens, with TK Maxx, Nike and Next (NXT), set to benefit.
‘TK Maxx was hit by the pandemic as it more store-based. Next has a strong online business but has negotiated 40-60% rent reductions with its landlords just as its stores will soon be reopening, he said.
The fund is up 131.7% over five years, well ahead of the sector average gain of 77.7%, ranking it 10/312.