Focusing solely on valuations, the expectation of a recession and overanalysing politics are three things that investors need to ignore, according to Kames Capital’s Neil Goddin.
The manager of the four FE Crown-rated Kames Global Equity fund said that instead they should be focused on finding good investments that the market is mispricing.
In recent years, the turbulent geopolitical environment has been a key driver in the belief among investors that the market could take a nosedive, yet so far it has not borne out.
Of note has been the protectionist policies from US president Donald Trump and the potential for a trade war between the US, its allies and rivals.
Goddin said: “Trump is making a lot of noise and nine times out of 10 it means bugger all. All this trade stuff is probably nothing: one time it will be a big deal, but we will deal with that as it comes.”
While the eurozone debt crisis, Brexit and other macro/political events have threatened the global equity market over the last decade, it has continued to rise, as the below chart shows.
Performance of index over 10yrs
Source: FE Analytics
The Kames manager said: “Since 2008, the right thing to do when we have had a sell-off is to buy more, yet I see this fascination with the next recession.
“We have been going into the next recession for the last five years. [I have heard that] from lots of people both internally and externally and over that time they have missed out on alpha by just not concentrating on stocks.
“One day they will be right and we will go into recession, but let’s not rush it and wait for it to happen.”
As a result of this expectation of a recession, a number of stocks have been pushed higher, including the likes of US soft drinks manufacturers Coca Cola and Pepsi. 
Such companies have risen anywhere from 10 to 20 per cent in recent months as investors have grown more concerned about president Trump’s trade policies.
These bond proxy stocks could come back down, however, if there is a chance that some of this rhetoric begins to change – such as improved relations with China.
Goddin (pictured) said: “Let’s not forget that the dividend yield of the MSCI World is not below US Treasuries so why would you buy Coke, unless you believe we are going into recession?
“Those real proper recession-proof bond proxies such as tobacco and fizzy drinks have all popped 10 or 20 per cent but I really don’t understand why because I don’t believe we are going into a recession.”
He added that the argument surrounding this rise is the belief that when interest rates rise the global economy goes into recession.
However, with interest rates coming from such a low base, there is no precedent and historical analysis is less valuable than it might have been.
“Everything about this economic cycle has been really long and I don’t see any reason for that to change,” the manager of Kames Global Equity said.
As well as geopolitics and the potential for a recession, the third thing investors are getting wrong is their view of valuations.
Many investors focus on the price-to-earnings (P/E) ratio, with companies on low-digit multiples largely viewed as cheap, with expensive companies on higher multiples.
However, Goddin said: “I think people focus on a P/E of 8x versus a P/E of 10x too much in general. You should invest in companies where you think the valuation is wrong – that is what is important.
“With hindsight I would like to say that nobody should have called Lehman Brothers at whatever share price it was value – it wasn’t value it was about 100 per cent expensive.”
He said that some companies on low multiples may well justify them, while others may be ‘expensive’ but still undervalued.
Part of the reason being a ‘value investor’ has been so challenging is that there is a lot of technology-driven deflation, which has changed the landscape of the market.
“It is why value investing has suffered as traditional price-to-book and P/E investing just doesn’t work,” he said.
It is also the reason that growth technology companies such as Facebook, Amazon, Apple, Netflix and Google – the ‘FAANG’ stocks – have outperformed over the last decade.
As such, he uses the Kames screen which doesn’t take into account valuation at all but instead looks for improving trends.
“It doesn’t matter where you start. You can have a P/E of 8x or 50x as long as the financial strength and the cashflow are improving we are interested,” he explained.
Instead, it focuses on whether the market is mispricing a company. This also means that he is not necessarily interested in the best-quality companies either.
He said: “Good companies is a really crap thing to say because that is what every manager says. That is not actually my job. My job is to find good investments and to find things that are mispriced.
“You understand what the implied valuation is today – what is the market telling me, what does it look like versus history and peers?
“I think a lot of people get caught up in the labels ‘I am a value investor or growth investor or quality investor’ and I am not sure that that is the best way to serve clients.”
At present, the manager said he is looking for companies that are disrupting industries, while avoiding those that are being disrupted, avoiding those on cheap P/E multiples if they are not worth the valuation they are on.
Goddin, who joined as co-manager in 2014, runs the Kames Global Equity fund alongside FE Alpha Manager Craig Bonthron.
Since he joined, it has generated a total return of 81.20 per cent, beating the IA Global sector average peer, which is up by 59.92 per cent.
Performance of fund vs sector since manager start
Source: FE Analytics
The fund has a yield of 0.68 per cent and a clean ongoing charges figure (OCF) of 0.85 per cent.