Hanson Sustainable Income Fund

Things can only get better

Markets in 2021 - “Things can only get better”

January 11th 2021


Disclaimer: this report does not constitute investment advice and is not a forecast. Past performance is no guide for the future.


Given our penchant at Arlington for music, we have chosen another popular anthem as the title for this year’s outlook piece: “Things Can Only Get Better” by D:Ream! The song reached number 24 in the UK chart on initial release, but after Peter Cunnah remixed it, the single spent 4 weeks at number 1 in the UK charts and reached the top 10 in 8 others. Happy New Year!


No one wants to review 2020, hence the title for this year’s outlook! However, the crucial market related lesson that we learned from 2020 is that Central Banks had not run out of firepower, quite the opposite as there was plenty of ammunition to aim at the Corona fire and their aim was astonishingly accurate. Sadly, they can’t cure viruses, but luckily it seems that Oxford University can(!) and they can’t create jobs, but we have seen their huge and timely ability to move markets and create much needed liquidity which in turn turned investors back from the brink.


Indeed, as COVID-19 vaccines are broadly distributed, we expect the economic recovery to be far more robust and inclusive than the economic recovery coming out of the global financial crisis. In particular, the services industry will rebound with greater intensity, benefiting many lower-income workers. This time around there should be gains in productivity, possibly at the expense of the levels of job creation seen after the GFC. The recovery in 2021 will be driven on a practical basis by the relief factor of being able to live a normal life. Our central expectation is that life won’t get back to normal until H2 2021. This is more cautious than our initial view six months ago. It would be unrealistic to expect that pandemic-related headwinds, such as the development of worse strains of the virus are a thing of the past. However, once a substantial portion of the population is vaccinated, we expect the economic recovery to be powerful. Based on vaccine production estimates, we expect both a relaxation in restrictions and a recovery in the consumption of services such as travel and eating out, in the first half of 2021. According to UBS, this should drive a recovery in corporate earnings. As a result, the Swiss bank forecasts 27% EPS growth in the 2021 fiscal year globally.


The stock market recovery so far has clearly begun to anticipate this, powered in 2020 by the world’s largest technology companies who drive markets due to their significant weight in the indices, which is the highest and most concentrated in history. As we emerge from lockdowns and other government interventions, many of these companies will slow, and the current engine of market growth will splutter. Pleasingly since Q3 2020 we have begun to see a rotation into value stocks which has helped our fund as the market has come our way. This is because most companies which pay dividends are classified as value stocks.  Something to keep an eye on is the (expected) increasing government scrutiny on one of these big tech companies. Just take a look at Beijing’s crack-down on Alibaba/Ant, US antitrust lawsuit against Facebook, Ripple’s collapse in the wake of a US lawsuit and the EU unveiling two draft digital-services laws. There is certainly more to come on this front.


Turning to fiscal policy, central bankers everywhere have uncharacteristically and extremely helpfully been falling over themselves to point out that interest rates will stay low for as long as possible. Or at least until inflation starts to rise above trend and that, looking at the futures, curve that is some way away. So the perfect storm of zero inflation and very loose monetary policy looks set to continue even if government stimuli fall away. Rationally we believe the net result is good for the stock market. To put a finer point on it, companies which are cheap due to recent earnings weakness and have market-leading industry positions will emerge stronger from the pandemic and should logically benefit from the threat of higher inflation because they have pricing power. To remind investors, these are the kind of companies that we seek out.


Looking at UK markets, we see a brighter outlook. According to UBS, “We expect a near-40% rebound in UK earnings in 2021, driven by the global economic recovery and the anticipated improvement in oil prices. The UK market also has a bias toward value stocks, which should perform well if the market begins to price in faster growth.” Other investment banks are also jumping on the bandwagon! In November, Goldman Sachs advised its clients to invest in British shares, predicting that a last-minute “skinny” free trade deal with the European Union would be announced soon. The investment bank also advised clients to “go long” on the pound, predicting that it could rise to $1.44 next year as the UK economy rebounds faster than previously forecast. This is in the context that the day before the Brexit referendum (22nd June 2016) a pound bought $1.48 or €1.31. Almost everyone now agrees that sterling is undervalued. Citigroup, Morgan Stanley and UBS have advised clients to buy British shares.


We at Arlington believe that international investors will gradually rotate back into UK equities as the year progresses, driven by cheap fundamentals, a more positive outlook for Sterling, earnings growth and an attractive yield. A Brexit deal will also help. We strongly believed that a deal would be done even if was at 1 minute to midnight and our fingernails were left in tatters! It is our central view that this will prove a trigger event for international investors to increase their allocations to UK assets.


Meanwhile, the UK market's attractive dividend will grow in 2021, drawing interest from income investors against a low-yield backdrop. When the fund was established in 2016, we were tempted to refer to it as: RONSEAL – ‘It does what it says on the tin!’ The ambition was to deliver to our investors a healthy and for the accumulation share classes to outperform the UK market over time. Although performance has varied overall these aims have been achieved, including in 2020 delivering a 4% yield to our investors. We also believe that equity income continues to look attractive in a market where investors seeking income are facing near-zero rates when using bank deposit accounts or Government Bonds. Thus the choice for investors requiring income is stark: either equity income to secure regular sustainable income, albeit with short term volatility, or bonds that trade risk and liquidity for very low levels of income.


We believe that our portfolio, which is made up of defensive companies that can grow their earnings in this environment such as AT&T, BP, Smurfit Kappa and Unilever, will weather any further storm well. Added to these is our exposure to an element of recovery that will help our more cyclical stocks like the oil companies. We are beginning to look again at those recovery stocks that will be in a position to dramatically improve their dividends in 2021 as life returns to normal.


We’d like to remind investors that the fund invests in large companies which dominate their industries and have market-leading brands. We believe that these firms will enjoy stronger, more resilient margins than their competitors and as a result their share prices should outperform over the medium to long term. We will use any short-term volatility, which we fully expect, as an opportunity to build up positions in our highest convictions. This later point is essential in order to preserve capital in volatile markets.


All in all, we are comfortable that the action we have taken to the portfolio during 2020 will deliver more sustainable dividends for our investors, more resilient growth for capital investors and that the market will come our way and income-bearing stocks will once again outperform.


We’d like to thank our investors for their support in a challenging year and naturally we’d be happy to talk directly with Advisors by phone or Zoom.


Disclaimer


This material has been prepared by Arlington Capital Limited ("Arlington"). It is for distribution only under such circumstances as may be permitted by applicable law. If this material is distributed outside the UK the protections available under the FSMA 2000 to Retail clients shall not apply. In addition, the compensation scheme available in the UK shall not be available. This product is only suitable for professional clients who are assessed to be capable of making their own investment decisions and understanding the risks involved.


It has no regard to the specific investment objectives, financial situation or particular needs of any recipient. It is published solely for information purposes and is not to be construed as a solicitation or an offer to buy any assets, securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the investments, assets, securities, markets or development referred to in the materials. It should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this material are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Arlington as a result of using different assumptions and criteria. Arlington, nor any of our directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material.


The value of an investment and the income from it can go down as well as up, it may be affected by exchange rate variations, and you may not get back the amount invested. Past performance is not necessarily a guide to future performance. The redistribution of this material is prohibited.


Please direct any inquiries with regard to statements made in this document to Arlington.


Arlington Capital Limited is authorised and regulated by the Financial Conduct Authority with FRN 810629, registered in England and Wales with CN 09578016, with its registered offices at 6 Arlington Street, St James’s, London, SW1A 1RE.


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The members of identified staff who are fully or partly involved in the activities of the Fund that havea material impact on the risk profile of the Fund, such as Directors and Investment Committeemembers and the like are compensated through a fixed salary. Variable remuneration rules andpolicies are not applicable since the directors and investment committee members are exclusivelyremunerated through a fixed salary and the reimbursement of expenses incurred in the carrying outtheir duties. Disapplication has been deemed justifiable and proportionate on the basis of anassessment of size, internal organisation as well as the nature, scope and complexity of the activitiesit carries out. The Directors have resolved to disapply the Pay-Out Process principles as listed in itsstandard licence conditions and not to appoint a remuneration committee. Such derogation wasapproved by the MFSA for a period of two years ended 21 January 2022. 

Disclaimer

This website is published by Ledbury SICAV PLC (a Malta UCITS V) regulated by MFSA No CIS/424, in part it has relied on information provided by its Investment Manager, Arlington Capital Ltd in doing so, regulated by the FCA. The website is introduced by Haymarket Capital Ltd. This material is intended for distribution only to authorised professionals who offer independent advice on financial matters to their clients. It is for distribution only under such circumstances as may be permitted by applicable law.

It has no regard to the specific investment objectives, financial situation or particular needs of any recipient. It is published solely for information purposes and is not to be construed as a solicitation or an offer to buy any assets, securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the investments, assets, securities, markets or development referred to in the materials.

The value of an investment and the income from it can go down as well as up, it may be affected by exchange rate variations, and you may not get back the amount invested. Past performance is not necessarily a guide to future performance.

The information on this website is not advice, it is provided solely to enable you to make your own investment decisions. The investments and/or investment services referred to may not be suitable for all investors. If you are unsure of the suitability of any investment, you should contact a Financial Adviser for advice.

Disclaimer

This website is published by Ledbury SICAV PLC (a Malta UCITS V) regulated by MFSA No CIS/424, in part it has relied on information provided by its Investment Manager, Arlington Capital Ltd in doing so, regulated by the FCA. The website is introduced by Haymarket Capital Ltd. This material is intended for distribution only to authorised professionals who offer independent advice on financial matters to their clients. It is for distribution only under such circumstances as may be permitted by applicable law.

It has no regard to the specific investment objectives, financial situation or particular needs of any recipient. It is published solely for information purposes and is not to be construed as a solicitation or an offer to buy any assets, securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the investments, assets, securities, markets or development referred to in the materials.

The value of an investment and the income from it can go down as well as up, it may be affected by exchange rate variations, and you may not get back the amount invested. Past performance is not necessarily a guide to future performance.

The information on this website is not advice, it is provided solely to enable you to make your own investment decisions. The investments and/or investment services referred to may not be suitable for all investors. If you are unsure of the suitability of any investment, you should contact a Financial Adviser for advice.