22nd April 2014
Invesco Perpetual’s head of UK equities and successor to Neil Woodford, Mark Barnett points out that while March enjoyed an improved outlook for economic growth in the UK, it was not however matched by an uplift in company forecasts…
The UK stock market concluded the first quarter of 2014 in negative territory, despite the improving news on the UK economy at the macroeconomic level. The Chancellor’s upbeat assessment of the economy in his Budget speech was more than offset by concerns over the outlook for emerging markets, most notably China. However, at a corporate level, there was negative newsflow for two UK sectors. Life insurers were impacted by an announcement in the Budget which removed the rule requiring the mandatory purchase of annuities. Food retailers were hit by deteriorating sentiment towards the sector due to fears of pricing pressure. The Invesco Perpetual Income Fund has minimal exposure to these sectors.
Over the month, the fund delivered a total return of -0.8% against a return of –2.6% from the FTSE All-Share index. Over the first quarter of the year the numbers are 2.3% and -0.6% respectively.*
The stock market’s retrenchment in March saw a fall in the price of some of the recent strongly performing shares, notably including the fund’s major holdings in BT Group, Capita and AstraZeneca. This was despite continued positive news for AstraZeneca. The company confirmed it had completed patient enrolment four months ahead of plan in the Phase III clinical trial for Brilinta tablets and that enrolment was underway in two additional Phase III studies.
The tobacco sector, meanwhile, continued its recent improved performance. Data from Australia showed that there had been minimal effect on consumption from the first year of plain packaging. There had been a rise in the level of illicit cigarettes sold. Furthermore there were signs that significant volume declines in Western Europe were levelling out. The UK government resurrected the possibility of plain packaging in the UK last November, when it ordered a review of the evidence on its effectiveness and since month end has announced that it is “certainly minded” to oblige cigarettes to be sold in plain packets, without giving a firm date for doing so.
The share prices of SSE and Centrica fell sharply late last year following Labour’s commitment to an electricity price freeze and subsequent comments from the current government confirming a likely investigation into the industry. Both companies’ shares have subsequently shown some recovery. SSE announced its own price freeze last month. This news was followed by news from Ofgem of a full competition industry review. This was well received by the stock market – the referral by Ofgem of the industry to the Competition Commission noted that there is no meaningful evidence of wrong doing or excessive returns, but just that some elements of the market are not functioning optimally. We expect the review to conclude that industry returns are not excessive, while moves such as that by SSE are already addressing the political agenda of pricing and transparency of margins.
Provident Financial is another fund holding whose shares have performed very strongly since its full year results in late February. The company’s Vanquis credit card provides a credit card for people who cannot otherwise get access to one due to impaired credit history. The company sees significant growth opportunities here as well as in a newer division – its Satsuma loans business. Satsuma is a new brand which competes in the short term loans business and Provident Financial has been working closely with the FCA to launch this product and crucially it leverages the existing infrastructure of the Vanquis’ call centre. The company is optimistic about the positioning of this product, which is differentiated from payday loans.
Two of the fund’s holdings in unquoted companies, Circassia and Xeros, floated on the UK stock market last month, with an associated value uplift over book cost. Following the exceptionally strong stock market performance by the small cap end of the market of the past year and against an improving economic backdrop, we expect further announcements of IPOs and trade sales as the next two to three years unfold.
The UK stock market’s rise of 2013 was accompanied by an improving outlook for economic growth in the UK and US, but was not matched by an associated uplift in the earnings forecasts for companies. Moreover, uncertainty about the strength of economic growth in emerging markets, especially China, is not supportive for the backdrop for global growth. With valuations now standing at a level anticipating upgrades to forecasts of corporate earnings, we believe that the performance of the market of the past year is unlikely to be repeated over the next 12 months.
However, we believe there are areas of the UK equity market that continue to look attractive. The fund is positioned with a focus on companies which we believe can grow revenues and profits in a low growth world, coupled with management teams that are focused on delivering sustainable, long term, dividend growth.