The Covid pandemic affected our lives in many different ways – emotionally, socially, economically and, in some respects, forever. From a financial market perspective, the onset of the pandemic in early 2020 created an alarming sell-off, which was followed by a surprisingly rapid rally, with some regional equity markets quickly returning to all-time highs.1 Since then, inflation has resurfaced, and global central banks have responded by increasing interest rates to their highest levels in a generation. This prompted another equity market correction in 2022, but what does the investment landscape look like from here and can investing for income and growth deliver the long-term investment outcomes that investors desire?
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.
It’s the economy, stupid
The phrase “it’s the economy, stupid”, was used by Bill Clinton in the US presidential race of 1992 to highlight one of his key campaign messages.2 The soundbite proved successful for Clinton, who became 42nd president of the US as result of that campaign, and it reflects the important role the economy consistently plays in society and politics. As one of the foundations of long-term stock market growth, the economy always matters. Economic growth and stock market progress are not always perfectly synchronised, but it is hard to envisage long-term growth in company profits, earnings and dividends, without a supportive macroeconomic backdrop.
Nowhere is this more evident than in the US, the spiritual home of capitalism, where innovation and entrepreneurialism sit side-by-side at the heart of America’s long-term economic success. US economic growth has exceeded that of most of its developed market peers for decades3 and this has also contributed to a significant and consistent outperformance from the US stock market in recent years.4
Even in the inflationary environment that has recently prevailed, the US economy has continued to prosper, as reflected in continued real GDP growth. Higher interest rates had been expected to trigger a recession in the US, and indeed in much of Europe, but the threat of this appears to have diminished,5 thanks to the resilience of America’s corporate sector.
Economic growth may remain somewhat subdued over the next couple of years, but investors looking to balance income and growth from a US-focused proposition may wish to consider the BlackRock Sustainable American Income Trust plc. This trust seeks to invest in high quality, well-established American businesses, with strong balance sheets and good management teams,6 with a sustainable investment approach, and currently offers investors a net yield of 4.4%.7 The breadth and diversity of the US stock market means there are always attractive investment opportunities for the investment team to consider, even when the economic outlook is more challenged.
Some regions of the world look capable of growing at a faster rate in the years ahead. Driven by positive demographics, improved infrastructure and better governance, regions such as Latin America look capable of growing rapidly as the gap between the developing and developed world narrows. Here, the BlackRock Latin American Investment Trust plc looks well-placed to deliver a positive balance between growth and income to its shareholders. Its experienced investment team draws on its extensive network in the region with the aim of unearthing exciting and attractively valued opportunities across a variety of Latin American countries and sectors.
Inflation – threat or opportunity?
Another part of the economic mix that is always worth considering is inflation. After more than a decade of relative price stability, inflation has re-emerged as a problem for many economies in the post-pandemic world. Interest rates have steadily risen as central banks have moved to quell the pace of price increases, and it seems likely they will remain higher for longer to bring inflation back under control.
This spells trouble for some asset classes, particularly bonds, where asset prices are inversely related to interest rates. Bond yields have moved significantly higher over the last couple of years, which improves the income return outlook for fixed income investments. However, bond prices are unlikely to start recovering until interest rates start to fall again. In the meantime, bond investors may struggle to achieve an attractive balance between income and growth.
Equities, however, are better placed because they can be viewed as “real assets”, which means they can mitigate the erosive power of inflation. Companies often benefit from pricing power, which allows them to increase their prices in response to inflation with risk of losing customers. In turn, therefore, the profits, earnings and dividends that are attached to a company’s equity, could grow in line with or even ahead of inflation. Like the relationship between an economy and its stock market, the benefits of pricing power won’t always be seen in the short term, but over the longer-term, inflation should not be unduly feared by the equity investor.
Within equity markets, certain sectors are more closely aligned to inflation rates. For example, the performance of the energy and mining sectors is naturally linked to the price of the commodities that they produce. Indeed, much of the inflation we have seen over the last couple of years, has stemmed from higher commodity prices, oil and natural gas in particular.
Blackrock has two investment trusts in this area. The Blackrock World Mining Trust plc provides diversified exposure to mining and commodities, including some of the raw materials that are essential to the shift to low carbon economies. The “greening” of the global economy requires significant change, which is expected to drive huge demand for supply-constrained commodities such as copper, lithium and other minerals. The Blackrock World Mining Trust is positioning to capture this long-term opportunity for its shareholders.
Meanwhile, the BlackRock Energy and Resources Income Trust plc offers a carefully selected portfolio that also provides exposure to the energy transition, alongside the companies that play a foundational role in global economic growth and prosperity. Indeed, we perhaps need to see a period of higher oil and gas prices in order to drive the investment required in cleaner energy technologies. The Blackrock Energy and Resources Income Trust is exposed to both and looks well-placed to deliver a balance of long-term income and growth.
The outlook for dividends
As a result of the pricing power mentioned above, company dividends should be able to collectively increase even in a period of higher inflation and higher interest rates. This is good news for investors looking to achieve a balanced total return.
Meanwhile, in some regions, starting yields look attractive. Investors need look no further than the domestic stock market for attractive yields, with the UK currently leading the way with a 4.4% yield.8 Here, the BlackRock Income and Growth Investment Trust plc may be worth considering. It currently invests more than 90% of its assets in UK stocks, and has a net yield of 4.0%.9
The importance of balance
Ultimately, many investors simply hope to achieve an attractive total return from their investments over time. The mix between income and capital growth may differ from region to region, and from fund to fund, but the importance of a good starting yield should not be underestimated.
In the growth-oriented market conditions of the last decade, income investing has perhaps become a little less popular among investors. Nevertheless, in the higher interest rate environment that now prevails, it could be due a comeback. Targeting a well-balanced total return could therefore prove to be a successful strategy in the years ahead.
