City fund managers discuss post-pandemic opportunities, with NatWest, Lloyds and BP topping the list
As the economy slowly recovers from what has been a dramatic year, and investors gradually dare to think again about growth and investment, Morning Wire checked in with a number of prominent Square Mile-based fund mangers to find out where they spot opportunities as London’s investment community starts to shake off the pandemic.
Banking, energy and mining
Alasdair McKinnon, who runs The Scottish Investment Trust, said that, going forward, he sees stocks that are able to pass on price rises in a timely manner as best placed.
“Banks, such as Santander [and] Lloyds, energy such as BP and Shell, and miners could all be beneficiaries of this,” McKinnon explained.
“Some of our largest holdings are gold miners, including Newmont and Barrick Gold – you can’t print gold and we expect its value to increase in line with the ballooning money supply,” he added.
Ian Lance, co-manager of the Temple Bar Investment Trust, said in agreement he has also spotted opportunities in energy, such as BP, materials, including Anglo American, financials such as NatWest Group and consumer cyclicals, most notably Marks & Spencer.
James de Uphaugh, who runs the Edinburgh Investment Trust, is equally interested in banks such as Natwest.
“Since inflation expectations are on a probable upward trend leads him holding banks, such as NatWest and commodity companies such as Anglo American, which is pivoting to commodities such as copper, crucial for the electrification necessary if the world is to achieve environmentally sustainable growth,” De Uphaugh told Morning Wire
Elsewhere, he has supported equity raises in the likes of Polypipe, which is in the “sweet spot of sustainability” and is illustrative of how in each of our holdings we integrate ESG into the investment decision, De Uphaugh noted.
Retail, hospitality and DIY stocks
McKinnon revealed that he has also added some of the most impacted industries like the high street.
“This is where we find some restaurants and clothing retailers with good brands and balance sheets that we think will allow them to re-emerge from the pandemic as long-term winners,” he noted.
For Alex Wright, manager of the Fidelity Special Values vehicle, it is primarily specialist retailers such as Halfords, car distributors including Inchcape, DIY stocks like Kingfisher as well as housebuilders such as Redrow and Vistry that got his attention recently.
“These are all areas that are seeing increased demand as households reassess their priorities and, importantly, where we believe the changing dynamics caused by the virus are likely to be longer lasting than currently factored in,” Wright explained to Morning Wire
“We continue to favour life insurers, which are well regulated companies with good risk management and which are seeing strong demand for bulk annuities and pension de-risking,” he continued, explaining that “the sector offers an attractive combination of cheap valuations, strong demand/supply fundamentals and growing earnings.
He revealed that his fund’s largest holdings in that space are Legal & General and Aviva.
“Conversely, we are underweight mainstream banks. While cheap, they lack a medium-term catalyst to re-rate given the low interest rate environment,” Wright stressed.
Instead, his vehicle has bought into UK-listed emerging market financials, such as Bank of Georgia, TBC Bank and Kaspi, which are able to generate strong returns in the current interest rate environment but have been “overlooked or lumped in” with the mainstream banks.
“We are also underweight energy having sold down our exposure to UK oil majors Shell and BP, which have cut their dividends and are embarking on a complex and high-risk transition towards a more diverse energy mix,” Wright said.
The UK mortgages market
Finally, Gary Moglione, the fund Manager of Seneca Global Income and Growth Trust, soon to be renamed Momentum Multi-Asset Value Trust, shared with Morning Wire that one stock which he thinks will do well is UK Mortgages (UKML).
“UKML had a difficult start after launch as market conditions meant they did not invest the initial capital very quickly which led to an uncovered dividend and a declining NAV,” Moglione said.
“They took a new strategic direction last year and are now focusing on the higher yielding mortgage books whilst selling the lower yielding. They essentially buy or initiate mortgages and when the number of loans reaches a reasonable size they will securitise them, locking in returns and freeing up capital to initiate more mortgages,” he explained.
A second value play for Moglione is Ediston Property Investment Company (EPIC). This trust focuses on out-of-town retail parks.
“The property market has been ravaged by Covid as many retailers struggle and some use company voluntary arrangements to force landlords to accept lower rents,” he said.
Risks
De Uphaugh said that a global risk he is particularly concerned about is that the economy accelerates so strongly in late 2021 that it puts upward pressure on inflation and bond yields forcing central bankers’ hands.
“Then, just as declining bond yields were so important in powering stocks in 2020, the reverse could happen, as policy makers cut back on liquidity. This would put pressure on equity valuations,” he explained.
Lance called the “enormous over-valuation” of the US stock market as “one of the greatest risks, combined with signs of speculative behaviour that are often associated with a market peak.
“A second one is the risk that central banks will fail to react as inflation increases and that inflation may get out of control,” he concluded.