MARKETING - The PRIDE Magazine by Liontrust - Flipbook - Page 15
UK EQUITY INCOME
Fund managers: Stephen Bailey, Jamie Clark
Liontrust’s Macro-Thematic team explain why they don’t back oil stocks.
At its Vienna meeting in May 2017,
oil cartel Opec agreed to extend the
production cuts it initiated last year in
an attempt to prop up crude prices
following their tumble in 2014. This
latest deal means that cuts are now
planned to stay in place until at least
the end of the first quarter of 2018 and
the agreement has been strengthened
by the participation of key non-Opec
members such as Russia.
However, while production cuts at the
end of last year had a short-term effect in
boosting oil prices, the uplift only served
to encourage more US producers back
online. The latest agreement essentially
gives the green light on production to
US operators to continue upscaling
production. Opec has found itself in a
difficult position ahead of the proposed
stock market flotation of Saudi Arabia’s
state-owned oil company Aramco.
Saudi Arabia – the largest member of
Opec – wants to boost oil prices to
increase the value of Aramco, even
though it must realise that a lot of the
benefits of Opec’s cuts are accruing to
operators in other regions, such as those
in the US.
to 10 years; companies in the oil and
gas sector fail this fundamental test. The
outlook for oil looks set to deteriorate
further over the medium and long term
as the industry faces up to the challenge
of viable energy alternatives. This
trend is increasingly visible through the
transformation of electric cars from an
expensive and inefficient curiosity to the
verge of mass-market penetration.
What is clear through these manipulations
is that the UK majors are left as impotent
price-takers that have no means to
influence the oil price. None of the
oil majors are held within the MacroThematic funds. We believe that the
decision to avoid them is an obvious
one. When we invest in a company we
need to be prepared to hold it for five
We believe that in broad terms the
oil majors require the oil price to stay
above US$50 a barrel to maintain
current dividend payouts and other
spending commitments. If the oil price
slips back below this level again, we
may see these companies forced to
adopt a hand-to-mouth dividend policy
funded by asset sales.
SUSTAINABLE INVESTMENT - EQUITIES
Fund managers: Peter Michaelis, Simon Clements, Neil Brown
The Sustainable Investment team review the long-term transformative trends of energy efficiency,
rapidly changing cars and the Internet of Things.
Ever since his election victory last year,
Donald Trump has concerned investors
with, among other unpalatable opinions,
his denial of man-made climate change
and his pro-coal stance, worries which
were heightened by his withdrawal of
the US from the Paris climate accord.
While Trump’s actions are troubling,
our view is that the transition to lower
carbon emitting fuels is at this point
driven more by economics than by
political impetus. Renewable energy
technology continues to come down
in cost, as the benefits of scale and
improvement in technology ensure its
economic competitiveness. Over half
of new power generation capacity
added in 2016 across the globe was
from renewable technologies. So the
theme of moving away from carbonheavy fuels and towards renewables
remains very much intact, and growth
opportunities continue to lie in these
new technologies.
This energy transition is just one of a
number of investment themes that we
target. We look for companies that can
make the world more efficient, provide
a better quality of life and contribute to
a more resilient global economy. We
believe these types of companies will be
able to survive and thrive in a rapidly
changing world.
The dawn of the digital age is a good
example of how rapid change can
create investment opportunities. The
explosion in digital technology has
changed the world in so many ways.
Most of us now feel lost if we don’t
have our smartphone close to hand,
while misplacing it feels a bit like losing
a limb.
Looking forward, one key digital growth
market will be autos. First driven by
‘infotainment’ within cars, the future for
in-car micro-chips is in Advanced Driver
Assistance Systems (ADAS) and the
emergence of electric vehicles. ADAS
is at the point of mass adoption within
vehicles: sensors and cameras around
the car will detect possible collisions
and brake, detect dangers in your
blind spot and identify potential issues
such as driver fatigue. Electric vehicle
adoption is also at a tipping point.
The market for smart machines, or
the Internet of Things (IoT), is another
significant opportunity. Think about your
fridge understanding when it’s unlikely
to be opened and thus regulating the
amount of power it takes from the grid.
Another example is the ability to track
key assets in the supply chain, such
as real-time monitoring of refrigerated
containers on ships to ensure no wastage
in perishable foods. Given most
machines are not currently connected
to semi-conductors, the opportunity set
is huge, and the potential benefits from
a resource efficiency perspective are
equally exciting.
Issue 1 Winter 2017 - TH E P R I DE - 15