Carl Stick and Alan Dobbie, co-managers of the Rathbone Income Fund:
Despite the strong performance, the UK market remains unloved. Perhaps it’s still Brexit. Perhaps it’s the pandemic. Perhaps it’s the potential for rate rises. Whatever the reason, investor surveys have been negative. Why should 2022 be any different?
Well, things have changed, and it does help that we prefer to take a longer-term view. Combined with the UK’s lowly valuation, investor pessimism provides the raw material for future outperformance – it’s very hard to make good long-term returns when investors are euphoric and markets are trading on extended valuations, which is what we are seeing away from the UK. Of course, there are headwinds in the economy, but there has also been good news, and a lot of it. Despite an increase in COVID infection rates, hospitalisations have thankfully not followed suit, and the UK economy has rebounded. People are in work. Businesses are growing. And the UK market is global, which means that our market is geared into reflation trades, and cyclical rotations. Dividends have recovered very strongly, and we have seen a slew of earnings upgrades during the last reporting season. And there is value in the UK market – just look at the M&A activity.
Are we at a tipping point? Well, who knows? But let’s think of it this way. Many strategists are predicting an extended future of negative real yields, as central banks look to diminish their debt piles. Unfortunately, for savers, and there are a lot of these in the UK, this heralds ‘financial repression’ – when the return offered to savers lags the corrosive effects of inflation. Investors in bond markets are feeling the same pinch. UK Equity Income offers an antidote to this pain, especially if it can offer real yields and real growth. Throw in better economic news, a stock market that is ridiculously cheap versus all other major markets, and an environment where surely sentiment can only get better, then arguably there is a margin of safety in the sector that should warrant careful consideration by investors.
David Harrison, manager of the Rathbone Greenbank Global Sustainability Fund:
We think the electrification theme is incredibly powerful, both in the global transport fleet and the wider industrial base. In 2020, we saw most of the large automakers pivot to a full electrification strategy much more quickly than people anticipated. Yet, we are still early on the electric vehicles journey – global electric vehicle penetration it’s still below 5%.
Another theme we are excited about is the circular economy. We expect more legislation to be implemented, particularly around the single-use plastics. We own Tomra, a Norwegian business, which is the leader in plastic recycling technology with strong heritage and reference projects. We also own Ranpack Holdings, the maker of eco-friendly packaging technology.
Whilst the global economy is starting to recover, we are still seeing obstacles and we think there will be volatility in the market ahead. Therefore, we remain focused on those high-quality businesses exposed to strong long-term sustainability themes. We believe these companies will be able to successfully navigate a changing landscape.
