Liontrust’s Seven New Year Opportunities

Mike Appleby, David Roberts, Olly Russ, Mark Williams, Jamie Clark, John Husselbee & Victoria Stevens

Enter our New Year’s Gallery to view our fund managers’ reasons for optimism at the start of 2019.

 


 

Mike Appleby, Sustainable Investment Equities team

Mike Appleby, Sustainable Investment Equities Team

 

The improving economics of renewable power are a clear positive moving into 2019. The cheapest form of any electricity generation in the UK (including nuclear and fossil fuels) is now onshore wind power. This makes the costs of moving to lower carbon electricity generation cheaper and more likely to happen sooner.

 

It has taken 19 years to install a terawatt (1000 gigawatts) of wind and solar power – a huge milestone. But we are at an exciting inflection point. It is predicted that installations will double within the next five years or so, meaning that the second terawatt of wind and solar generation would be achieved four times faster and at nearly half the cost of the first terawatt.

 

Our view is that the market is massively underestimating the magnitude and persistence of this trend towards renewables and the beneficiaries of this transition are lower carbon technologies (especially wind and solar), as well as companies improving our ageing electricity grids and power infrastructure.

 

The energy transition is happening and will accelerate. This is a really positive development in the fight to control anthropogenic climate change.

David Roberts, Global Fixed Income team

David Roberts, Global Fixed Income team 

 

We believe a yield in excess of 7% is a great long-term entry level, offering investors in the US high yield sector adequate compensation for default rates and increased volatility. As the market moved back to that level at the end of 2018 – hitting 8% before the year was out – we substantially increased exposure in our strategic bond portfolios.

 

Comments from the US Federal Reserve – with Chair Jerome Powell seeming to soften on further rate rises are supportive in the short term for risk and positive for our high yield purchases. Euphoria may not last, however, so we are wary about calling the bottom.

 

What we can say is that for the first time since at least mid-2016, when yields were last at these levels, we can look clients in the eye and feel confident about US high yield.

 

Olly Russ, European Income team

Olly Russ, European Income team

 

European equities remain unloved despite corporate Europe finding itself in increasingly rude health. Perhaps investors need reminding that the corporate backdrop does not necessarily reflect the political one!

 

To illustrate, we have revived the same chart we highlighted at the start of last year. We can see that a new high in earnings growth of 9.2% is predicted for 2019. In combination with the increases seen in 2017 and 2018, this means that earnings will have risen by more than a quarter over three years.

 

In particular, ‘value’ names (think utilities, financials and telecoms) are at rock-bottom levels and many of these produce good solid dividends. Banks were largely awful performers in 2018, but they have been left on super-cheap valuations. For those with smaller risk appetites, the insurers also look good value, but suffer from fewer of the negatives. Insurance is a good European niche and includes global household names such as AXA, Zurich, Allianz and Munich Re.

 

Markets are often defined by a change in the marginal buyer, and few areas are as unloved as European value, although a catalyst in the shape of rising yields or inflation may ultimately be necessary to change investor behaviour. Will 2019 be the year that value turns?

 

Mark Williams, Asia team

Mark Williams, Asia team

 

While a confluence of factors combined last year to push Asian markets lower, these headwinds are unlikely to persist in 2019. The worst should be behind us, meaning that Asian equity valuations should present opportunities.

 

The most obvious concerns for 2018 were the European Central Bank reducing its bond buying programme, the US Federal Reserve shrinking its balance sheet and interest rates rising around the world, which have led to, amongst other things, a strong US dollar. Adding to this nasty backdrop for 2018 was the escalation of a trade war between China and the US.

 

This year, however, interest rates in the US are not likely to rise as frequently as they did in 2018, meaning the dollar will probably not strengthen as much, and recently there seems to be an honest attempt to patch up relations between China and the US.

 

Jamie Clark, Macro-Thematic team

Jamie Clark, Macro-Thematic team

 

We find opportunity in the fact that UK inflation expectations are on the rise once more. Whilst inflation is a scourge and shouldn’t ordinarily give cause for optimism, circumstances suggest we should be more relaxed about the current upswing. There is clear demarcation between current inflation expectations rising in parallel with buoyant UK wages, which denotes an economy performing over and above gloomy Brexit prognoses, and the disinflationary pressures of the last decade.

 

This should remind Mark Carney of the Bank of England’s price stability mandate and accelerate the pace of UK rate hikes. This is great news for short duration ‘value’ businesses as investors clamour for immediate returns. Happily, our funds’ weightings to telecoms, life insurers, banks and miners mean we are positioned to take full advantage.

 

John Husselbee, Multi-Asset team

John Husselbee, Multi-Asset team

 

Following a drop off in global markets and growing fears about trade wars and rising interest rates, investors are understandably asking whether the long bull market in equities is nearing its end.

We have quoted Sir John Templeton heavily in recent months: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.” For us, the US is at stage three – and potentially well through that – but the rest of the world is still at two.

If you exclude the US, equities still generally look good value. In the UK, for example, the FTSE 100 dividend yield is 4.9% compared to a fairly anaemic 1.3% on 10-year UK gilts (government bonds).    

UK equities have yielded more than gilts since 2011 but we would suggest stocks will not be offering 4.9% forever and yields on government bonds will begin to climb in line with base rates, as we have seen in the US. The 10 largest companies in the UK currently offer an average yield close to 5.6% and this seems a fairly compelling entry point however you feel about trade wars or Brexit.

 

Victoria Stevens, Economic Advantage team

Victoria Stevens, Economic Advantage team

 

One of this year’s highlights for me and the rest of the Economic Advantage team will be the three year anniversary of the UK Micro Cap Fund in March. This is an important industry milestone for any fund manager and we are no different.

 

We have been fortunate enough to have invested against a pretty benign stock market backdrop over the last three years, despite some turbulent times on the geopolitical front.

 

The past few months have presented a more challenging environment, but while there is no guarantee that investor sentiment will recover in 2019, we can take comfort in our bottom-up investment approach, which means it’ll be a case of ‘business as usual’ in our team whatever macro surprises the year has in store for us.

 

If the current market weakness continues, we will view this as an opportunity to identify stocks whose long-term fundamentals are undervalued. In the long run, buying into quality companies when others are selling can prove a very fruitful strategy. Because we target micro-cap companies with barriers to competition, we think they can prove more resilient than average to any exogenous shocks.

For a comprehensive list of common financial words and terms, see our glossary here.

 

Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from it can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

 

This Blog should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Tuesday, January 8, 2019, 1:51 PM