Is the UK market a buying opportunity over the longterm?
Richard Colwell, manager of Threadneedle UK Equity Income, talks us through opportunities in the UK...
I don’t know about you, but after four months of spending almost all day, every day, in my house, I couldn’t wait to book a holiday as soon as lockdown restrictions were lifted.
Usually we’d head off abroad for sun, sea and/or adventure, but this year we’re sticking to the UK. We’ve swapped a plane for the car, a hotel for a yurt and all-inclusive for a BBQ. In just three weeks’ time we’ll be escaping our own four walls and heading off to the great British countryside. I cannot wait.
While there are now a number of ‘air bridge’s in place, I imagine many other Brits will be doing the same thing. And whether it’s planning picnics and days out with friends, spending lazy days in pub beer gardens, or heading off camping or to an Airbnb in another part of the country, there will be a number of businesses that will benefit from our spending habits within the next few months.
We take a look at where Elite Rated managers are investing in our staycations.
In a much-needed boost for the UK travel industry, hotels have been allowed to reopen since the fourth of July and are already busy welcoming their first guests in over three months.
InterContinental Hotels Group has hotels all around the world and its brands include Crowne Plaza and Holiday Inn. A top ten holding in Threadneedle UK Extended Alpha*, the group has managed to open 90% of its global real estate already.
Both BMO European Real Estate Securities and Premier Pan European Property Shares have a top ten position in Land Securities*, which owns (amongst many things) 23 hotels**. Marlborough Multi Cap Income owns Secure Income REIT***, which itself invests in a few hotels including Travelodge, and Baillie Gifford Strategic Bond^ holds a bond from Whitbread – the owner of Premier Inn.
Airbnb is also likely to be a beneficiary of the move towards socially distanced breaks. Although still an unquoted company, it has been held by Scottish Mortgage Investment Trust for some time.
Meanwhile, if you are looking for some excitement after weeks of repetition, the reopening of theme parks might be good news. Both Baillie Gifford High Yield Bond and Baillie Gifford Strategic Bond own corporate bonds issued by Merlin Entertainments^, the owner of Alton Towers and Chessington World of Adventures.
M&G Optimal Income also recently bought a new bond issue from Walt Disney*. Disneyland, the company’s metropolis of nostalgia, fantasy and futurism, opened 65 years ago on 17 July 1955 and is celebrating its 65th year this year.
Of course, there is also the fickle British weather to contend with and, while we’ve been blessed with a lot of sunshine over lockdown, there is no guarantee it will continue. But for rainy days, the cinema is once again an option.
Royal London UK Equity Income holds Cineworld^^. Manager Martin Cholwill said: “Social distancing shouldn’t be too hard in cinemas as they are usually only at 20-30% capacity anyway. The July new film releases should coincide with reopening too.”
Marlborough Multi Cap Income owns Cineworld as well^^^. Manager Siddarth Chand Lall added: “The company has agreed facilities for additional loans to ensure it could survive even if the cinemas remain closed for the rest of 2020. In fact, Cineworld expects to be reopening sites globally by the end of July, with confidence around booking and seating reconfigurations to allow COVID-19 social distancing norms.”
When it comes to food, supermarkets should benefit this summer, as the stay-at-home mentality continues. Man GLG Income owns Morrisons*, Ninety One UK Alpha holds Tesco*, and JOHCM UK Dynamic holds both in its top ten*. TwentyFour Absolute Return Credit prefers a J Sainsbury bond*.
Fast-food chains have been open for a few weeks now, but they should continue to benefit during the summer months too. McDonald’s is a top ten holding in Lazard US Equity Concentrated fund* and its bond was bought by Jupiter Strategic Bond during the March sell-off. Domino’s Pizza is a holding in Unicorn UK Smaller Companies fund^*.
And then, of course, there are restaurants and pubs, although booking in advance will be key as capacity will greatly reduced due to social-distancing rules.
Royal London UK Equity Income owns Restaurant Group, although the manager took some profits in May as the share price had risen over 12% since the previous month’s placing.
As one of my colleagues pointed out recently, lots of these companies’ shares have been trading at very low valuations, due to the obvious risks of lockdown. Their fates are now very binary: where businesses survive there may be opportunities to make big returns. Equally though, some businesses are likely to go bust. So the most critical thing to determine is whether the business can survive.
But if the queues outside shops in the high street and pubs last weekend were anything to go by, a good number of people are keen to get out of the house and do something different. Customer numbers are likely to be lower due to both restrictions and the fact that some of the population is not as willing to return to normal just yet, so profits may be lower, but if we can avoid a second lockdown, staycations this summer could give these companies the life-line they need.
*Source: Fund fact sheet, 31 May 2020
**Source: Annual Report 2020
***Source: fund commentary 1 May 2020
^Source: FE Analytics, full holdings, as at 30 April 2020
^^Source: Webinar, June 2020
^^^Source: fund commentary 1 June 2020
^*Source: FE Analytics, full holdings, as at 30 June 2020