Page 23 - DIY Investor Magazine - Issue 27

The third area, which is a bit more disparate, is the whole area of recovery; companies that are not structurally challenged, that have a good long-term outlook but depressed to some extent by the pandemic and with the scope to recover and very modestly valued if you build that recovery into their prospects. So industries like civil aerospace, media, telecommunications
– the shares are quite depressed in that sector – and energy; industries with further to go on the recovery path, could see good returns. We’ve got some significant investments there as well, so quite a broad array of areas we’ve found to invest in, yeah.
JC: Building on that, Simon, do you think we’re finally seeing a resurgence of value investing? Do you think some of the more challenging aspects that we face there might be over, and that this is a space to explore more and potentially yield results?
SG: Yeah, we saw a sharp recovery in value in the last quarter of 2020; after a period of extreme polarisation, value has started to perform better. The gap between lowly and more highly-rated growth companies remains historically extremely high; the market is still quite polarised, with further scope for those areas of the market to come together.
There may be reasons why that might happen this year, because as economies recover there tends to be a better environment for more cyclical, value businesses. Also interest rate expectations or government bond yields could rise if there’s any sign of inflation coming through. Historically, low interest rates have supported high-growth companies, but higher interest rates tend to support the more depressed, cyclical companies, so there are reasons why we think that that value-versus-growth polarisation can narrow.
However, we focus on individual companies, individual situations, trying to buy good businesses that are lowly rated for their own prospects, so we’re not totally dependent on the whole value/growth cycle turning. That’s not the only thing we’re thinking about. We are buying real businesses, making real products or services, at sensible prices; hopefully the value trade continues, but we’re not totally dependent on that sort of big-picture style view, we focus on individual companies.
JC: So Simon, final question - your thoughts on the fact that the UK has successfully negotiated a trade deal with the European Union; what do you think that means for markets going forward given all the uncertainty that has predated this move?
SG: Thanks, Jon, it’s good to get the news out of the way and focus on the future; as we discussed many times last year, whether or not we got a trade deal was not the biggest issue.
The biggest issue to the market was the uncertainty; now that uncertainty has been removed, like we saw on news of the Pfizer vaccine in November, when the market could look ahead to life after Covid.
With the news out of the way, we know what the arrangements are and investors can look forward and reassess from first principles whether companies in the UK are good places to invest. We were quite optimistic anyway, because the vast majority of profits and sales – something like three-quarters – for UK listed companies come from abroad; most companies in the UK are actually global businesses that happen to be listed here. Some industries – like banking, like housing – are quite dependent on the domestic economy, but many others are global.
So we were never overly concerned for the UK company profit outlook from the Brexit negotiations, but it’s good to have some certainty so we can focus on the fundamentals for 2021.
JC: OK Simon, we are out of time; it’s always a pleasure, but thank you very much indeed.
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23 DIY Investor Magazine | Mar 2021