MARKETING - The PRIDE Magazine by Liontrust - Flipbook - Page 14
INVE S T MEN T U P DATE S
UK EQUITIES
Fund managers: Anthony Cross, Julian Fosh, Victoria Stevens, Matt Tonge
The managers of the Liontrust Special Situations, UK Growth, UK Smaller Companies and UK
Micro Cap funds discuss the key events of recent months.
One of the key themes to emerge from
the aftermath of the Brexit vote in the
past year has been the depreciation of
sterling and the subsequent impact on
inflation in the UK.
UK companies have seen their overseas
buying power diminish and some of
the resultant cost increases of importing
goods have been passed onto the
consumer. This process has been
prominent in the latest readings of the
UK Consumer Prices Index, which have
shown annual increases above the Bank
of England’s 2.0% target and reached
3.0% in September 2017.
The rise in inflation is outstripping nominal
wage growth, meaning that UK real
wages are in decline. This is likely to put
pressure on consumers, who have – up
until now – enjoyed a prolonged period
of meagre price inflation.
For companies, sterling weakness is a
twoedged sword, negatively affecting
those which need to import goods or
services, but beneficial for those which
export. Our investment process tends
to find plenty of companies in the latter
category. It also identifies net importers,
but - importantly - we believe that the
companies we invest in possess pricing
power. This pricing power not only
insulates a company from competition, it
also allows it to cope better with inflation.
In simple terms, a company with pricing
power can pass on some or all cost
inflation rather than having to absorb it
through a reduction in profit margins.
Good quality companies with barriers
to competition that help sustain earnings
should in our view be particularly
highly valued by investors given the
current political and macroeconomic
uncertainty. Precise definitions of ‘quality’
vary from investor to investor, but they
all include the notion of companies that
earn high returns – usually high returns on
capital or equity – as well as possessing
strong balance sheets. These types of
companies often have greater control
over their own destinies than those which
lack such attributes and are more at the
mercy of external factors.
EUROPEAN INCOME
Fund managers: Olly Russ, Oisín O’Leary
This promised to be a politically tumultuous year for Europe. Liontrust’s European Income team
analyse the economic impact and developments.
Politics has become an increasing
concern for investors with the Brexit vote
and the election of Donald Trump both
catching the market off guard.
The heavy electoral timetable in Europe
in 2017 was seen as a serious risk at
the start of the year due to the possibility
that further headway could be made by
various populist movements. However,
it was always the case that populist
insurgencies were likely to remain some
distance from the levers of actual power
in Europe, having little effect on the
governments of their various nations.
As the Netherlands and France, among
others, have now returned election results
which were seen as market friendly, this
has allowed investors to switch their
attention to the underlying prospects for
14 - THE P R I DE - Issue 1 Winter 2017
the European economy. Here the story is
surprisingly positive.
There are now more and more
encouraging signs as the European
economy normalises, and even previous
laggards begin to fire on more cylinders.
We see evidence of a steady economic
recovery in Europe. The unemployment
rate has fallen to its lowest level since
the immediate aftermath of the financial
crisis. Additionally, headline consumer
inflation in the eurozone has reached the
European Central Bank’s inflation target
of close to but below 2.0% following
a period of deflation. Confidence has
returned to the European economy and,
by extension, its stock markets. Research
analysts, whose job it is to forecast the
performance of European companies,
have so far this year been upgrading
their estimates of profits in 2017. This
marks a stark contrast with the previous
six years, each of which has seen
nothing but relentless downgrades.
This profits growth – if sustained – should
represent the beginning of a virtuous
circle of declining bad debts leading to
banks making more capital available for
loans, leading to more growth and so
on. There are also encouraging signs
that overseas investors, long fearful of
Europe due to its potentially negative
political complications, are returning,
which could be a welcome boost to
markets. After all, it is usually the political
events not in the calendar that turn out to
be the most eventful – just ask the UK.