David Goldman, manager of the BlackRock Income & Growth Investment Trust gives his perspective on the year ahead.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Amid the macro-driven markets of the last three to five years, share prices have often behaved erratically. There have been times where stock markets have done very little, only to wake up suddenly and move quickly. Often the catalyst for change has been evident for some time, but has been overlooked by markets focused exclusively on interest rates and inflation.
We have seen this in a number of our holdings in 2023. Companies have moved based on sentiment, rather than any significant change in the business fundamentals. However, we have started to see this change more recently, with the market more sensitive to the operational performance of companies. For our investment approach, this is welcome.
BlackRock Income & Growth Investment Focus
A market more focused on the fundamentals of individual companies may start to recognise the value inherent in many UK shares. The low valuations of UK shares have now persisted for a number of years. We believe this anomaly can’t persist indefinitely.
We have been finding more and more domestically-focused names that meet the criteria for inclusion in the fund. Our approach focuses on a company’s cash flow generation, and finding companies with the potential to grow their dividends over the long term. During 2023 that has included investing in out-of-favour companies such as Admiral, Centrica, Next or Howden, and we have more housing and consumer exposure than we have had in the fund’s recent history.
This focus on domestic companies has not come about because we believe the UK economy is likely to soar. It still has a number of structural challenges. Nor do we believe that rate cuts will be a panacea. Rates are only likely to come down significantly if economic activity is very weak and this is not our central case. It is more likely that rates will come down, but relatively slowly.
Value in UK shares?
Nevertheless, domestic UK companies are currently showing the strongest value, and the economic backdrop is likely to be benign, if unexciting. There has not been a significant slow down in the labour market1 and real wage growth has been helpful for the consumer2. Corporates are cautious, but no more cautious than six months ago3.
There are other factors that may improve the relative standing of the UK in the year ahead. 2024 is set to be the largest voting year on record4. The UK has more political visibility than most other developed markets, particularly in Europe where far right parties are exerting a destabilising force5. While there are still uncertainties in the UK, there is a reasonably clear picture on the business environment for the next four to five years. This should be helpful for sentiment.
Portfolio Confidence
We have confidence in the companies we hold in the BlackRock Income and Growth Investment Trust portfolio today. The vast majority of the companies that we have bought over the last 12 months have high cash flow, stable and sustainable business models, and low debt. In our view, the overwhelming sense of negativity that has pervaded the UK market has gone too far and there are reasons to re-examine the UK market today. It may have a role in an income or growth portfolio.
At some point, we believe the tide will turn. Pension funds and global investors have been selling down UK equities, but now hold very low levels. Marginal buyers could emerge, drawn to the UK by compelling valuations, higher dividends and strong income growth6. We hope 2024 will be the year investors reacquaint themselves with UK equities and UK equity income funds in particular.
1Office for National Statistics – UK Labour market – December 2023
2Office for national Statistics – Average weekly Earnings Great Britain – October 2023.
3Credit Connect – Business optimism rises – 9 January 2024
4Economist – 2024 is the biggest election year in history – 13 November 2023
5FT - The far right is moving into Europe’s mainstream – 27 November 2023
6BlackRock, January 2024
Risk Warnings
Investors should refer to the prospectus or offering documentation for the fund’s full list of risks.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Trust Specific Risks
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Liquidity Risk: The Fund's investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
