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A view on financial markets, a new decade beckons

Monday, 13th January 2020 07:18 - by David Harbage

This blog has regularly provided an update on what has been occurring in financial markets and, as we move into a new decade, it may be helpful to follow up the previous article dated 3 October 2019 by sharing the author’s current thinking. In particular, to comment on the prime issues or concerns that long term investors in stock exchange assets face, provide brief feedback on the performance of previously mentioned investments in 2019 to date and comment on the outlook.  


This report can be summarised by saying that 2019 proved to be a good one for appropriately diversified investors in the stock market, as it ‘climbed a wall of worry’. The much hoped-for ‘Santa rally’ arrived, as the two prime uncertainties overhanging the economy (US-China trade tariff ‘wars’ with global implications and Brexit for our domestic one) and risk assets (notably equity and real estate) eased. Agreement on stage 1 of the US-China trade negotiations and the general election (aka Brexit) result in the UK represent major steps forward. While the eventual outcomes of these two issues is (several years away, and) difficult to call, the stock markets’ thermometer (reaching new highs) and barometer (as forward-looking assessors of prospects and valuation) are giving positive readings.


Uncertainty can be a greater negative headwind than actual bad news, and the unhelpful  protracted tariff negotiations between the United States and its trading partners (in particular China, but increasingly Europe) has led to a slowdown in boardroom sentiment and global economic activity, as multinational businesses defer capital investment plans and consumers choose to save rather than spend. It remains to be seen if confidence recovers quickly, to the point of seeing real top-line growth in 2020.   


Closer to home, and for more than three and a half years, the outlook for the UK’s economy, its currency, fixed interest and equity (company share) markets has been clouded by the all-consuming Brexit issue. While the Conservative government now has a working majority to deliver the UK’s exit from the European Union, many pundits suggest negotiation of trade terms may not be accomplished by the target date of 31 December 2020 – raising the spectre of a ‘No Deal’ departure from the EU.      


Looking forward, the US presidential election in November represents the most critical issue to occupy investors’ thinking. If, as Bill Clinton’s strategist James Carville opined, “The economy, stupid” will be the determining factor of success, the incumbent has a very real chance of re-election. The consensus of economists expect growth in America’s GDP to be just north of 2.0% in the coming year (aided by 2019’s rate cuts) – which should be sufficient to maintain a ‘feel good’ factor – and, to date, the Democrats do not appear to have found a clear or credible challenger to Mr Trump. Wall Street appears happy with the current political landscape and several of its leading strategists have predicted a further significant, if perhaps final, leg in the current bull market which has now extended beyond a (longer than normal) decade. Some US market strategists have predicted that the catalyst could be a further cut in US rates, which are currently in the 1.5% to 1.75% band, towards 1%.


While there is typically a 12-18 month lag before rate cuts have a real economic impact (to say nothing of when corporate revenues or profits may be influenced), the immediate yield-based valuation of fixed interest instruments and company stocks should be favourably impacted. Current consensus expectations are for US and UK listed firms’ earnings to rise by 8% over the next twelve months – with a similar figure applying to global company profit growth, albeit perhaps a little lower in the Eurozone. That magnitude of growth may pleasantly surprise some, but universal reductions in direct corporate taxation and foreign exchange translation benefits for UK quoted, non-domestic businesses are providing tailwinds.


Analysis of risk and reward, prompted by the inverted or abnormal yield curve (higher rates of interest available at the short, rather than at the ten year or longer end of the government bond market), has featured the traditional Growth versus Value discussion in equity selection. Heightened debate that the cycle might be moving from favouring premium-priced businesses demonstrating superior Growth, (often accompanied by high quality or reliability factors), towards lower-priced Value companies, (regularly featuring ‘fallen angels’ as well as smaller ‘yet to be recognised’ newcomers), has taken place in research houses on Wall Street, in London and across European bourses.


This writer has an unashamed bias towards Value – so perhaps might have missed out on very highly rated/priced stocks in futuristic, high-growth industries such as technology. Given the choice, many of us would prefer to persevere in owning apparently unloved assets, whose visible business or operational model is simpler to comprehend or have faith in, and which offers the prospect of enjoying a positive re-rating emanating from consistently beating (probably low) expectations.


In terms of individual company shares and collective funds, this Value orientation – frequently features a bias towards smaller or medium sized UK equity and domestic business sectors. Intuitively, as has been proven historically, smaller companies can outperform larger ones: interested management can be nimble and adapt to changing circumstances or opportunities more quickly than the largest businesses – offsetting the inevitable higher cost of capital.  


In terms of company shares, investors are encouraged to take a longer term view and prioritise income over capital appreciation when assessing total returns, (as most of equity’s historic superior performance comes from the growth in – and the reinvestment of – its dividends). The author’s previous blogs have often focused on the relative attraction of equity investment by reference to their earnings (the price-to-income multiple, known as the PE ratio). The proportion of such profits paid out as dividend income – and expressed as an income yield – will often come to the fore, when comparison is made with the interest, property rent or other income which can be earned on other assets which compete for a long term investor’s savings.     


Another metric which fund managers use when assessing the merit, and the fair valuation, of a company’s equity listed on a stock exchange – or indeed the overall equity market or private company shares - is its asset worth or ‘book value’. In theory, where the book value exceeds the share price a company could sell all of its assets and shareholders would be left with a surplus. The reality is that most listed company shares are priced at a significant premium to the worth of their assets, as the majority of businesses focus on earnings – and sharing those profits with their owners (in the form of dividends) – rather than concentrating on achieving asset appreciation on their balance sheet.


Having said that, such a focus on a firm’s finances (assessing its assets and liabilities) is a fundamental part – along with investigating Profit & Loss and Cash flow statements - in assessing the appeal of an equity investment. Most commentators believe that the UK equity market appears attractively valued – as compared to the US or most other globally  listed stock markets, (as well as by contrast to the historic valuation of UK shares) - by reference to price:book value (P/B ratio). Looking at the FTSE100 index’s Price to Book multiple since the turn of the millennium, the average level of that index’ prices has been 2.25x of its book value. It reached a high of 3.2 times in 2007, just ahead of the Banking crisis, before reverting back towards the trend level in 2011.


The ratio ‘progressed’ further to exceed 2.5 in 2015, but currently UK share prices are significantly below the post year 2000 median at just 1.8 times book value. Along with a much lower price-to-earnings ratio (and a higher dividend yield compared to cash or gilt yields) than has historically applied, this reinforces a wish to possess an overweight exposure to UK equity - notwithstanding the very real global and local concerns that could impact the shorter term pricing of company shares.   


While the ‘bull market’ on Wall Street has exceeded ten years, survey evidence pointing to US fund managers becoming more positive - in allocating more of their assets to equity - is an encouraging one. As seasoned stock market observers will appreciate, US equities normally enjoy a strong rally in the year of a Presidential election. That company shares often enjoy a strong burst in the final leg of a bull market is also a truism which argues for investors ‘keeping their nerve’ when global economic data is unexciting or geo-political concerns dominate media headlines.


This report makes no excuse for reiterating that history shows that markets ‘fall on negative rumour, and rally on fact - even if adverse’ and therefore attempting to correctly time entry or exit points in the stock market is nigh on impossible. Bounce-backs occur so quickly that only a fortunate few benefit from what are often double-digit share price jumps in modern, computer-driven trading. Owners of stock market listed companies should always be taking the longer term view – with a minimum retention period of five years or ten years, but perhaps more probably ‘an indefinite, foreseeable future’ should be considered as the appropriate time horizon.


The 2019 version of the Barclays Equity Gilt Study, which reviewed the performance of prime sterling-based financial assets from 1899 to the end of 2018, found that in considering every 5 year period, UK company shares beat a £ higher rate deposit bank account on 76% of occasions. The probability that shares outperform cash rose to 91% when assessing the respective total return (of income, plus or minus any capital movement) over every 10 year time period.


It is appreciated that most UK private clients will focus on the local landscape, rather than on global prospects – notwithstanding the fact that as much as three quarters of the revenue and profit earned by the constituent companies of the FTSE100 index arise overseas. Although it is to be hoped that investors in the portfolio are taking the long term view and are likely to retain their stock exchange investments for a decade or more (to ride out economic cycles, as well as unexpected natural disasters or dramatic geo-political events), it is only human nature to have concerns about the immediate future. The fund manager or personal investor has to ask him or herself if the prospects for any investment are under or overvalued (or correctly ‘priced in’) by the market, assessing the likely future performance from the different kinds of asset – as well as the magnitude of the threat to those returns.


The prospective and existing investor should look at the relative attraction of the various, differing investible assets – from cash (sterling versus other currencies) to bonds (longer term interest rates or loans of varying duration and quality), through to equity (company shares, listed on the London or overseas stock exchanges, as well as well as private, unquoted businesses) – in terms of potential returns over the next year or so.


In our previous blog, we flagged the following issues – the outcome of which the reader might have a clear view or no real conviction - as being most influential in affecting investor sentiment in the short term:


‘Tariff or trade wars’ as the United States-instigated action to address imbalances with its trading partners, The impact on China, in particular, has slowed global economic activity.

The rise in populist politics, reversing a trend for greater globalisation in trade, is acting as a drag on business and consumer confidence - as well as raising unhelpful tensions between, and intra, nations.

The obvious domestic issue Brexit is set to progress, following the general election result, but uncertainty still exists in the form of a ‘No Deal’ - in regard to the all-important (from a business perspective) signing of a UK-Euro trade agreement – with many commentators suggesting that this cannot be accomplished within the proscribed 31 December 2020 deadline.

A risk-averse environ remains evident with negative real (after taking account of inflation) interest rates – in overnight money, but also across government and many investment grade (BBB or higher credit rated corporate) debt issues.

As global economic growth appears to have peaked last year, the prospect of interest rate hikes have receded, and been replaced by cuts – in turn reinforcing the relative value (as compared to other asset types) of credit and equity.

Corporate earnings growth, aided by lower rates of taxation, was exceptional in 2018/19 – but, while profit and dividend progression is set to exceed inflation in the current year, the prospect of slowing economic activity in 2020 is likely to mean that the pace of growth in company profits will weaken. The market has been quick to punish, and often slow to reward, trading results that do not match expectations.

While the pace of top-line revenue growth may ease, company balance sheets appear robust (in the absence of any significant rise in the cost of servicing debt) and, for the most part, dividend cover is supportive. In such an environment, financially strong firms will seek to grow their businesses via acquisitions, re-engineer their balance sheets (bringing down their cost of capital by issuing low coupon bond debt) and boost earnings by buying back their own shares.   


The writer’s current view is that global economic growth will be reasonably robust - forecasting real GDP growth for 2019 at 2.6% (notably lower than the 3.1% anticipated this time last year. Essentially, that means expecting gross domestic product to rise by 2.6%, after inflation, compared to 2018’s higher expansion pace of 3.2%. Looking forward, the previously mentioned trade tariffs remain at best a significant unknown, but we anticipate unchanged levels of economic activity in both 2020 and 2021 forecasting global GDP growing at a rate of 2.5%.


In terms of drivers to reach that conclusion, we expect the all-important US to deliver GDP just north of 2.0% and for the pace of growth in the world’s second largest economy, China, to ease from 6.2% in 2019 to 5.8%. Anticipating such an environ, any interest rate hikes will be few and far – and, in magnitude, small - over the next twelve months and, with local inflation typically exceeding nominal rates, deliver negative returns to holders of cash.


For instance in the UK, cash rates of 0.75% lag local inflation; the CPI (Consumer Price Index) is currently 1.5% but, having fallen to its lowest level for three years last October, inflation is likely to pick up in 2020 towards its official target level of 2%. The same scenario applies in the US, Japan and in the Euro zone. In such an environment, to hold large sums of one’s liquid, long term savings in Cash or conventional government bonds is unappealing. The current yield to redemption of a ten year conventional British Government stock is just 0.75%. This is gross of tax and, like Cash, is clearly not offering a real (inflation beating) return, especially after deduction of income tax.


By contrast, inflation-linked bonds provide some relief, as they offer the prospect of appreciation in capital - and growth in income. Consensual thinkers do not expect a hike or a reduction in US interest rates over the next year (after the Federal Reserve made three cuts in July, September and October 2019). Below-trend economic growth in the UK and the Eurozone will not prompt central banks to hike. UK Bank rate and Eurozone rates are unlikely to move from their current respective 0.75% and 0.0%, but one can retain a prospective outlier: evidence of an early trade agreement with the EU and a significant fiscal stimulus in March’s Budget could see our base rate rise to 1.0% (a step towards ‘normalisation’) later in the year. By contrast a ‘no trade deal’ by the end of 2020 could prompt the Bank of England to stimulate the domestic economy by cutting interest rates down towards 0.25% (with resultant £ weakness).


After the fourth quarter’s strong equity performance, including a significant rebound in the UK – making 2019 a particularly good year for company share investment - a ‘pause for breath’ in the asset class might be expected in 2020. Current geo-political tensions in the Middle East represent an exceptional unknown (beyond prospect of higher oil prices which depresses economic activity) factor. Leaving that aside, this observer expects 2019’s year-end momentum towards risk assets (which include property) to continue into 2020, and anticipates a 5% uplift in capital terms for global equities.


The UK represents something of a special case, given its relative neglect by overseas investors since the 2016 EU referendum and last month’s significant easing in uncertainty (even if the ideal business solution of ‘Brexit cancelled’ has not occurred). Notwithstanding the rise in sterling and domestic company stocks (found most obviously within smaller company indices, rather than the FTSE100) since December 12, most commentators and fund managers forecast further progress in 2020. According to a poll by the AIC (Association of Investment Companies), 33% of respondents named UK equity as their favoured area for investment, with 19% voting for Emerging Market equity, 10% European equity and 10% United States equity before a tail of other areas.


Readers of this blog will already be aware of the relatively low valuation of UK listed company shares – as compared to overseas developed stock markets, based on earnings and asset value (typically up to 30% cheaper, on both metrics, than the United States). There is no logical reason why the likes of AstraZeneca, BHP Group, BP, British American Tobacco, Diageo, GlaxoSmithKline, HSBC, Prudential, Reckitt Benckiser, RELX, Rio Tinto, Royal Dutch Shell, Unilever and Vodafone – 14 of the largest, by market capitalisation, 15 British multinational companies should be priced at a discount to their overseas peers. If you are wondering, Lloyds Banking Group (a domestic-centric business) is the 11th largest constituent of the FTSE100 index). 


Our expectation is for UK equity to deliver a double-digit return in 2020, which would imply that the FTSE100 reaches a new high of 8,000 by the year-end (a capital return of 6%), enhanced by an income distribution of 4%. Having said that, within the overall market (represented by the FTSE All Share index), one can expect the FTSE250 and the FTSE Small Cap indices to outperform – in part as predatory overseas businesses buy what they perceive to be undervalued (priced in £) assets. So perhaps the big ‘8k’ on the Footsie might arrive later in the new decade.  


With limited appetite for bonds at their current low yielding valuation levels – the 10 year gilt currently yields just 0.75%, as previously intimated - or cash, company shares continue to offer more appeal as a long term investment. The ability of well-managed businesses to adapt and prosper, even in difficult or uncertain economic circumstances, encourages selective ownership (or ideally be fully diversified via an index tracking fund or procure active management by delegating investment decisions to a professional fund manager) – especially in recognition of their ability to increase dividend pay-outs.


For similar reasons surrounding the prospect of income growth from higher rent rolls, real asset ‘bricks & mortar’ in the form of commercial property retains its appeal. Geographically, the domestic market has limited physical space, especially in the south east of England; accordingly, well-located assets are likely to appreciate over the longer term. Offering a rising rental stream and the prospect of exceptional capital enhancement, as a result of landlord or management improvement, property merits a position in portfolios. It is appreciated that some readers, owning one or more residences and their own business premises may be loath to commit more of their savings or retirement wealth to commercial property, but it is important to own different types of asset to achieve diversification and reduce one’s risk profile (in particular, not to own too much equity).


It might be helpful to indicate how the writer would currently allocate assets taking the appropriate longer term perspective – mindful that actual weightings would depend on an individual’s circumstances, appetite for risk and objectives:

Underweight Bonds – by owning government, risk-free inflation linked domestic and international bonds (but having no exposure to conventional gilts) across all maturities, along with investment grade (BBB rated or higher) sterling-denominated company bonds and global higher yield corporate bonds. The former in expectation of inflation picking up (in both the UK and other major developed economies), the latter in expectation of the continuation of higher economic growth in emerging economies, allied to the prospect of falling corporate delinquency rates in developed markets. Exposure to these assets could be captured by the use of low-cost tracker funds, essentially diversified ETFs, in order to minimise default risk on individual corporate bonds. We are mindful that interest rates are low, as compared to history, and have limited scope to fall further - but that inflation is more likely to surprise on the upside.

Underweight Property – owning commercial (rather than residential) property funds, featuring active managers with a clear bias to industrial warehousing & business units (rather than High Street retail, where downward rentals are being negotiated) as well as index tracking vehicles to gain exposure to the UK’s largest listed property companies whose share prices are typically priced on a double-digit discount to underlying asset worth. Mindful that ‘bricks & mortar’ assets enjoy a supply-demand (scarcity) benefit in the UK, but that demographic and cultural change casts uncertainty over the ability of landlords to raise rents (notably in retail, and away from central London) at historic rates in the short term.           

Overweight UK equity – in recognition that UK company shares enjoy an unprecedented income yield advantage, as compared to the perceived ‘risk-free’ returns offered by government bonds and cash. Brexit-recession fears drove significant dispersion in the valuation of the various industry segments in 2019, with domestic industry sectors - and especially smaller companies - particularly neglected to appear inexpensive.

Underweight Overseas equity – preferring UK listed multinationals, which can provide the investor with exposure to the world’s higher growth economies, as they typically represent better value (based on earnings and asset backing). The prospect of a rebound in a seemingly oversold sterling also persuades for this position.

Overweight Flexible assets – primarily investing in alternatives (to listed company shares) via undervalued (by reference to share price at a discount to underlying asset value) investment trusts. One is entrusting these fund managers to select the appropriate assets to deliver to their objective (usually a capital preservation perspective).

Underweight Cash – given the low absolute return on offer compared to the other asset choices. Mindful, as mentioned previously, that retaining a cushion of liquidity can enable the diligent investor to take advantage of buying opportunities as they present themselves. In extremis, the low yielding inflation-linked government bonds could also provide a further source of funds should exceptional opportunities arise.  


Finally, the author takes a look at the shorter term capital performance (taking no account of income distributions which would have depleted the capital worth) of a typical (based on this blog’s previous mentions) portfolio’s constituents. In particular, proffering a few comments on the final quarter of the year’s returns as well as detailing calendar year performance:


i shares UK Inflation-linked government bond ETF retraced the advance seen in the third quarter of the year, as the price moved back from 20.3p to 18.6p in the quarter period under review. Began 2019 at 17.9p, so capital appreciation from this asset was 3.9% over the calendar year.

i shares Global Inflation-linked government bond ETF delivered similar returns as the domestic linker - retreating from 134.4p to 124.5p in the last three months - as further rate cuts (notably in the US) were anticipated, and sterling strengthened in an expectation that Brexit-related uncertainties would abate. Beginning 2019 at 120.4p, capital appreciation was 3.4% over the year as a whole.

i shares UK Corporate Bond ETF took a breather on its 2019 year to date progress – moving from 151.8p to 151p in the latest quarter, aided by evidence of reducing delinquency risk and hopes of a monetary stimulus in the event of a No-deal Brexit. This investment began the year at 139p, so capital appreciation was 8.6% over 2019 as a whole.

i shares Global High Yield Corporate Bond ETF retreated from 76.4p to 73.7p, as fears of rising corporate defaults resulting from a slowing global economy impacted. Beginning 2019 at 72.7p, capital appreciation was 1.4% over the calendar year.

Picton Property investment trust advanced from 87.6p to 97.1p, as indigestion surrounding the big mid-year placing was resolved and industry news flow improved. Beginning the year at 88.3p, so capital appreciation was 10% in 2019.

i shares UK Property ETF extended its strong progress in 2019, advancing from 590p to 668.2p, a level not seen since 2015 as domestic investors focused on the asset’s income attractions and international buyers warmed to £-priced real assets. Beginning 2019 at 575p, capital appreciation was 16.2% over the calendar year.

Tritax Big Box REIT ‘marked time’ in the final quarter, its price slipping from 147p to 146p, despite encouraging feedback on its recently acquired logistics developer Symmetry. Beginning the year at 139p, capital appreciation was 5% in 2019.

Mercantile investment trust benefitted from investors welcoming an easing in uncertainty surrounding the domestic economy as the Conservative party gained a workable majority in the general election – the shares advanced from 210p to 266p. Beginning 2019 at 192.5p, capital appreciation was 36.6% over the year.

Schroder UK Mid Cap investment trust shares the same FTSE250 index benchmark as the Mercantile trust, but historically has been priced on a higher discount to NAV - the shares advanced from 528p to 688p. Beginning the year at 457p, capital growth was 50% over the year.

Henderson Smaller Companies investment trust in similar vein enjoyed a recovery in investor sentiment towards domestic businesses, the shares rising from 855p to 1097p. Beginning 2019 at 823p, capital appreciation was 33% over the year.


JP Morgan Smaller Companies investment trust ‘fishes’ in the same Numis Smaller Companies universe as Henderson Smaller, but historically has been priced on a higher discount to NAV. The shares jumped from 219p to 320p in the final quarter of 2019; beginning January at 195p, capital growth was 64%.last year.

Aberforth Smaller Companies investment trust is a Value focused trust (notably on balance sheet and cash profits) and excludes AIM stocks. The shares advanced from 528p to 688p. Beginning the year at 457p, capital growth was 50% in 2019.

We witnessed a strong bounce in smaller and medium sized company investment trusts in the final quarter of 2019 – reflecting growth in underlying asset value and traditional discounts to NAV all but disappearing. Active investors will therefore consider owning an actively managed, more accurately priced (mark-to-market, priced according to actual investments held) open-ended fund or a lower cost index tracker. If the latter appeals, both Vanguard and Blackrock (via its i shares proposition) merit investigation.

i shares FTSE250 ETF offers exposure to the UK’s medium size companies (essentially the next largest 250 listed businesses beyond the FTSE100), without the risk of closed-ended trusts’ discounts to NAV expanding and returning to historic levels. In the final quarter, the shares advanced from 1864p to 2065p. Beginning 2019 at 1700p, capital growth was 21% over the year.

Barclays made strong progress, as the final date for PPI claims passed and political uncertainties subsided, its shares rose from 150p to 183p. Beginning 2019 at 158p, capital appreciation was 16% over the year.

Bellway along with its industry peers extended the progress made in the previous quarter, rising from 3287p to 3829p. Investor sentiment towards the sector was aided by political unanimity on the need to build more homes and the prospect of overseas investor neglect of domestic businesses reversing. Beginning 2019 at 2680p, capital appreciation was 42% over the year.

Persimmon had been on the wrong end of public, as well as investor, relations (directors’ bonus scheme, poor build quality) over the past year or so – but, by contrast, boasted healthy finances and earnings. Its shares’ rose from 2110p to 2700p in Q4 ‘19. Beginning the year at 2377p, capital growth was 13.6% in 2019.

Redrow shares appear undervalued by reference to its peers (per earnings and dividend pay-out): for the year to 30 June 2021 a consensus of 8 research analysts forecast earnings per share (EPS) of 93.6p – a price to earnings ratio of 8.1 times – and a 48p dividend, implying a yield of 6.3%. Of those UK-based analysts, 6 recommend a purchase and 2 say hold. In the quarter Redrow stock progressed from 603p to end the quarter at 752p (and appreciated by 28% in 2019, having begun January at 586p).

GVC Holdings enjoyed another strong period of share price progress, advancing from 765p to 917p as investor focus moved from domestic High Street bookmakers towards a liberalising US industry. Beginning 2019 at 693p, capital appreciation was 32% over the year.

Prudential, marked time at 1460p in the third quarter of 2019, as its M&G asset management arm was demerged and investors worried about the political turbulence in Hong Kong. Beginning 2019 at 1390p, Prudential’s capital appreciation was 5% over the year.

A preference for neglected stocks is also evident in the choice of Aviva shares, which rose from 384p to 419p in the final quarter of 2019. Beginning the year at 386p, growth was 8.6% in 2019. The stock appears undervalued by reference to its earnings and dividend pay-out: for the year to 31 December 2021, a consensus of 17 research houses forecast EPS of 63.9p – a price to earnings ratio of 6.5 – and a 33.4p dividend, equating to a yield of 8%. Of those analysts, 8 suggest Buy, 9 Hold while none recommend a Sell.  

Royal Dutch Shell endured a turbulent year, with its ‘B’ shares underperforming the wider UK equity market – slipping from 2400p to 2256p, despite a US$2.7bn repurchase of its own shares. The proverbial ‘never sell Shell’ suggestion may have been ignored, but its assets and cash generation retain long term appeal. Beginning 2019 at 2390p, capital depreciation was 5.6% over the year – coincidentally close to the shares’ current 6.2% income yield.

Carnival would benefit from a falling oil price (in response to slowing demand, prompted by the impact that trade tariffs would have on the global economy). Also on a significant discount to the wider market’s average, the shares appear undervalued by reference to its earnings and dividend pay-out: for the year to 30 November 2021. A consensus of 22 analysts forecast EPS of 373.4p – a price to earnings ratio of 9.3x – and a 164.3p dividend, indicating a yield of 4.6%. Of those 22 UK-based opinions, 5 suggest Buy, 15 are neutral (scope for upgrading their recommendation) and 2 say Sell. Better than expected trading results has propelled Carnival shares away from a near four year low mark of 3060p in October – ending the year at 3645p (compared to its January 2019 level of 3815p), recording capital depreciation of 4.5%.

i share FTSE100 ETF reflected the wider UK equity market and advanced from 728p to 750p, despite sterling’s strength, as the prospect of the Brexit overhang appeared to be resolved by the election result on 12 December. Beginning 2019 at 675p, capital appreciation was 11% over the year.

Law Debenture investment trust made further useful progress, up from 570p to 650p, as investor demand saw the share price’s discount to net asset value tighten to 8.2% (NAV is currently circa £7). Beginning 2019 at 550p, capital appreciation was 18% in 2019.

Blackrock Energy & Resources Income investment trust struggled to make progress as commodity prices were held back by sluggish demand; the shares sliding from 71p to 70.4p. Beginning 2019 at 73p, capital depreciation was 3.6% over the year. Incidentally, this compares with the shares’ annual income yield of 5.6%.

Herald investment trust continued to enjoy the prospect of further merger & acquisition activity amongst its technology-related, UK-focused portfolio of businesses and the shares progressed from 1301p to 1484p. Beginning the year at 1190p, capital appreciation was 24.7% in 2019.

Vanguard All World High Dividend ETF fluctuated within a tight 5% band in the fourth quarter and barely progressed, rising from 4428p to 4451p, as sterling strength adversely impacted to cancel out investors beginning to favour value-biased equity. Beginning 2019 at 4035p, capital appreciation of this income-oriented tracker fund was 10.3% over the year.

i shares MSCI Europe ex-UK ETF rose from 2890p to 2958p, despite weakness in the Euro currency and further evidence of economic slowdown in the region. Beginning the year at 2552p, capital appreciation was 16% over 2019 as a whole.

Caledonia investment trust progressed from 3005p to 3164p benefiting from its discount to net asset value tightening to 14% – NAV is estimated to be in the region of 3686p. While the FTSE All Share index is often used to assess this trust (which possesses significant unquoted investments), the manager seeks to preserve the real worth of its capital – aiming for annual total returns of between 3% and 6% over inflation. Beginning the year at 2865p, capital appreciation was 10.4% in 2019.

Henderson Alternative Strategies investment trust, by contrast with other flexible investment managers (like Capital Gearing and Harbourvest Global Private Equity investment trusts), returns have proved pedestrian. The shares moved from 266p to 266.5p, By contrast with its peers, the shares’ discount to NAV widened from 18% to 20%. Beginning 2019 at 270p, capital depreciation was 1.3% over the year.

Ecofin Global Utilities & Infrastructure investment trust stabilised, the price being static at 163p, with the net asset value (around 167.5p) struggling to progress, reflecting the strength of long duration infrastructure assets at the later stages of an economic cycle. Beginning the year at 124.5p, capital appreciation was an impressive 31% in calendar 2019.

Pantheon International investment trust progressed from 2320p to 2580p as investor demand for this flexible asset – which focuses on unlisted investments, participating in private company placements – saw its share price discount to NAV tighten from 17% in January to 4%. Beginning 2019 at 2113p, capital appreciation was 22% over the year.

i share Physical Gold ETC eased from 2335p to 2275p as, prompted by progress in the ‘trade tariff war’ between the United States and China, investor demand for risk recovered in the final quarter of 2019. The recent rise in geo-political tension in the Middle East illustrates our dangerous world and an intuitive appetite for ‘safe haven’ assets like precious metal. Beginning 2019 at 1972p, capital appreciation was 15.3% over the year.

Cash was unchanged, producing no income worthy of mention.


Previous blogs have commented on the higher risk-reward inherent in individual company shares and this has been consistently borne out in previous quarters. However, the final three months of the year produced a few surprising outcomes. In particular, of the above mentioned investments, the weakest return in the quarter arose from what text book theory (risk-free capital) would suggest is the safest: the -8.4% capital return from i shares UK Inflation-linked government bond ETF.


Of the other investments producing negative capital returns in the quarter period, three were bond funds (ranging between -0.5% and -7.4%), otherwise one from each area of asset type: property (Tritax Big Box REIT -0.7%), flexible (i share Physical Gold ETC -2.6%) and an overseas equity fund (Blackrock Energy & Resources Income investment trust -0.8%). However, counter intuitively, the largest negative return from an equity investment came from the biggest company within the FTSE100 index: Royal Dutch Shell (-6.0%).


The best positive performances from the above mentioned monitored investments in Q4 ’19 came from two particular sources: UK medium and smaller size companies,  (aided by investment trusts’ peculiar financial gearing and discount tightening attributes) Aberforth, Henderson, Mercantile, JP Morgan, Schroder delivering returns of between 9.4% and 25.3%. In addition, the particularly domestic industry which is house builders - featuring Bellway, Persimmon, and Redrow - also made contributions of up to 25% in the final quarter of 2019 as domestic economic uncertainty appeared to ease.


However, strong performances (via double-digit capital returns) came from other sources: company shares Barclays (+22%), Carnival (+14.7%), GVC Holdings (+12.6%) and Aviva (+12.4%); property i shares UK Property ETF (+13.2%) and Picton Property (+10.8%); specialist investment trusts Herald (+14.1%), Law Debenture (+14%) and Pantheon International (+11.2%). 


Finally, it should also be noted that the above mention of performance takes no account of income – which could be significant on the higher yielding assets, in particular the corporate bond ETF, the property and UK equity holdings. 





The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.


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