The Pride - Issue 5 - Autumn 2021 - Magazine - Page 15
UK EQUITY INCOME
Fund managers: Stephen Bailey, Jamie Clark
Many investors shun the miners. Here, Liontrust’s Macro-Thematic team reveal why they think the
sector is worth a second look.
The mining sector remains out of
favour with investors, who recall the
commodity ‘super-cycle’ and the related
capital indiscipline. During this period,
miners ignored shareholder returns
and pursued production expansion at
any cost. Excessive investment led to
overproduction, high debt and falling
prices when demand growth slowed in
line with the Chinese economy. We are
now more than a decade on from the
beginning of these strategic errors and we
think it is time for investors to reconsider.
We have initiated a Macro-Theme into
our funds: Resource Scarcity, which is
comprised entirely of mining stocks.
We believe the sector trades at an
unwarranted discount as miners now
have a better understanding about the
perils of overproduction. Balance sheets
are now looking healthier as debt has
been reduced through the sale of assets
and foregoing dividend payments.
Thankfully, shareholder returns are now
the principle focus. The assertion of
capital expenditure austerity and a clearer
picture for how cash will be spent should
provide further comfort to the market.
Tightening spending is not only a short
term positive for miners’ cash piles after
capital expenditures (free cash flow), but
may also influence pricing and the future
balance of supply and demand. We
expect increasing demand for certain
key commodities as the global economy
adjusts to a low carbon future and electric
vehicles become more mainstream.
China, of course, remains an important
factor in the fortunes of miners given
that it is the world’s largest consumer
of commodities. We see a trade
war between China and the US as
background noise and prefer to focus on
the favourable macro backdrop. Chinese
demand is likely to remain healthy
as the government stimulus packages
boost infrastructure spending. From a
supply perspective, fundamentals are
enhanced by Chinese efforts to reduce
the environmental impact of production.
There has been an unprecedented and
robust clamp-down on “dirty” domestic
production at Chinese mines, which will
certainly benefit seaborne supply from
Brazil and Australia.
The future looks encouraging for the
sector and with current management
focused on shareholder returns, it
is likely that we may benefit from a
sectoral charm offensive fuelled by
an expansion of free cash flow and a
stronger pricing environment.
MULTI-ASSET
Fund managers: John Husselbee, Paul Kim
Liontrust’s Multi-Asset team explain why they believe now is the time for value style stocks.
A key part of our multi-asset investment
strategy is looking to buy favoured
areas when they are cheap. With this
in mind, we have added exposure to
so-called value stocks over the course of
this year. We believe that those investors
still pouring into growth companies
– think “FAANG” stocks (Facebook,
Amazon, Apple, Netflix and Google)
– are ignoring the golden rule of buy
low, sell high.
Value investing has a long-term track
record, championed by the likes of
Warren Buffett, but followers of this
strategy have suffered a lost decade
since the end of the Global Financial
Crisis (GFC). By its contrarian nature –
buying stocks out of favour and therefore
undervalued by the market – value often
endures periods in the wilderness, but
its recent malaise when compared to
growth names has been so prolonged
that Goldman Sachs debated last
year whether value investing is dead.
The investment bank concluded it is
too early to give up on value, saying
current ‘unfriendly conditions are
unlikely to persist’.
have boosted many sectors of the
economy in 2018. If Trump continues
his deregulation plans, financials are
also an obvious beneficiary.
Strong performance from growth
stocks since the GFC (see page 18) is
understandable, with investors willing to
pay up for companies able to outgrow a
sluggish global economy. According to
Goldmans, ongoing ‘secular stagnation’
has inspired investors to favour stocks
capable of generating their own growth
over value names. That has supported
the FAANGs and many others, whereas
financial companies – a bastion of value
as much as technology is of growth –
have spent the last decade weighed
down by ever-increasing regulation.
Value stocks tend to outperform when
economic expansion is broad-based
and relatively robust – generally at
the start of an economic cycle – and
there are signs we may be coming
out of the sluggish growth of recent
years. We are currently in a rare
period of synchronised global growth
and the upward pressure on inflation is
increasing, mainly due to wage growth
rather than commodity prices – and,
historically, such an environment has
favoured value.
Particularly in the US, the gap between
growth and value has reached historic
levels and we identified a solid case
for this starting to unwind in the shape
of President Trump’s tax cuts, which
A final driver for value is the opportunity
these fundamentally cheap stocks can
offer after a decade out of favour.
Again, buying low – over many
decades – can prove a very successful
investment strategy.
Issue 2 Winter 2018 - TH E P R I DE - 15