264. Is it time to be optimistic about the UK economy?
City of London Investment Trust manager Job Curtis discusses the current state of the UK economy ...
With Brexit still undecided, a Christmas election here in the UK and President Trump’s impeachment on prime-time US TV, there was a lot to talk about when FundCalibre hosted its annual investment trust event on Monday 11 November 2019.
Financial journalists from national newspapers such as The Times and Sunday Times and specialist titles such as Investment Week and Moneywise, were given the opportunity to meet three Elite Rated investment trust managers and grill them on the outlook for their asset class and the financial stories of the day.
From recessions to Peppa Pig, sin stocks to KitKats, here’s what they had to say.
Job Curtis, manager of City of London Investment Trust, told us that domestic-facing company shares have been priced for an apocalyptic scenario: “Investors are presuming the worst with Brexit and these shares are therefore cheap,” he said.
“At its core, the City of London portfolio is still predominantly made up of companies with overseas exposure. But I’ve used new money and proceeds from the Green King takeover to add to companies like RBS and Morrisons. If we get any clarity and resolution from the election in December, and then Brexit in January, they could do very well.
“When it comes to the banks, Lloyds and RBS are good dividend providers once again. Barclays is still cheap, but interesting – it is the ‘last man standing’ really in terms of European investment banking divisions and this area of the business has been dragging it down. But it has a great domestic operation and I’ve been adding to it.
“I’m also overweight house builders. The Conservatives want more people to own houses and counties have targets on new-build homes. This helps house builders. Under a Corbyn government we could see more social housing being built instead.”
Bruce Stout, manager of Murray International Investment Trust, is more cautious, however. “I went to a conference recently where it was pointed out that the UK has spent the past 40 years aligning every single industry to the EU,” he said.
“The links will still be there, even when the UK has left the union. We need new legislation, new specifications… it’s a very complex situation and will take years to unravel. So my view is, why take that risk when you don’t need to? And I’m in the fortunate position of running a global equity income fund, so I’m looking more outside the UK and Europe.
“The evolution of Murray International investment trust has been gradual, but significant, over the past 20 years,” he told us. “In 2000, it was difficult to get income growth anywhere other than the UK, so the trust had a disproportionate amount in the home market.
“With some foresight and a bit of good luck, we were early to start diversifying the income stream into Asian and Latin American companies, as these continents started to embrace dividends – and we have seen payments go up ever since. The markets are more shareholder friendly, while the likes of the US still wastes money on share buybacks. Twenty years on and the trust has the lowest exposure to the UK that it has had in my lifetime, and the lowest allocation to Europe.”
Peter Ewins, manager of BMO Global Smaller Companies, says his trust’s weighting to the UK has also decreased over the years. However, while many UK smaller companies are domestically focused, a surprising number source the majority of their revenues from overseas. “So we have a mix in the portfolio,” he said. “I bought Ibstock, the brick company recently, so we have increased our UK domestic exposure slightly.
“Mergers and acquisitions (M&A) have picked up a bit recently. We’ve seen Entertainment One – the company behind Peppa Pig – being bought by US company Hasbro. We’ve also had a US railroad company taken over, so it’s not just companies snapping up UK bargains. Low interest rates in the developed world mean that companies can afford to acquire other businesses. We may see more M&A next year – I expect it to be a reasonably busy market.
“While there is a lot of focus on climate change at the moment, when you are investing for income it is difficult to avoid sin stocks completely,” Job commented.
“Whether we like it or not, the world still runs on oil. The move to electric cars has been slow – still is – and there are simply no alternatives for aeroplanes or shipping at the moment. Storage of renewables is also still being developed.
“So while many oil companies are moving towards more renewables, in the shorter term, other fuels like liquified natural gas (LNG) are doing well, as it has lower carbon emissions. For example, China is moving to LNG and Shell provides 25% of China’s LNG supply. The company has brought down the cost of production and is yielding 6%.
“You can make a lot of money from declining industries, as we have seen with tobacco companies over the years. I met the management of Imperial Brands just last week. The profits are holding up on cigarettes – better than alternatives in fact. I hold Imperial Brands and British American Tobacco in the portfolio. BAT yields 7% and Imperial Brands yields 11%. The dividends are both covered by free cash flow. I hold a 4% position across both stocks.
Bruce agrees that these industries are still attractive for income. “Ten years ago I would have had about 11% in tobacco companies. Today I have about 5%. I’m not looking to add to those positions as they are not growth companies, but they do pay a good dividend.”
Bruce invests directly into emerging markets. “Asia today is not about absolute income levels but about purchasing power parity and the multiplier effect,” Bruce told us. “Only politicians and athletes left China at one time. Now Chinese tourists are having an impact in many places – so companies do not have to be based in China to benefit from this trend. I own shares in Auckland Airport in New Zealand, for example – a popular destination for Chinese holiday-makers. In fact, I don’t have any direct holdings in China.
“Brazil is another interesting country. We’ve been invested there for 20 years or so. You have to accept that it will be volatile, and you are vulnerable to currency movements. The military left in 1985 and since then there has been a succession of different governments, but foreign direct investment continues, because businesses know they can do business there no matter who is ruling.
Peter, on the other hand, prefers to buy third party Japanese and emerging market funds instead of individual companies, because it is not the team’s area of expertise. “I do the research myself, with the help of a team member, but I’m lucky enough to be able to tap into the skill set of Gary Potter and Rob Burdett, who managed BMO MM Navigator Distribution – a multi-manager fund,” he told us. “They have proven to be very successful at identifying good boutique fund managers that are not well-known necessarily in the market, but who have provided good returns. I can use these guys as both a sounding board and as a source of new ideas.”