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The outlook for investment and the economy in the UK in 2014

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13 March 2014

Mark Barnett, Manager, Edinburgh Investment Trust, Perpetual Income and Growth, Keystone and Invesco Perpetual Select UK Equity.

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At Invesco Perpetual Mark manages four investment trusts; The Edinburgh Investment Trust plc, the Perpetual Income and Growth Investment Trust plc, Keystone Investment Trust plc and the UK equity portfolio of the Invesco Perpetual Select Trust plc. Management of The Edinburgh Investment Trust plc is a recent appointment and recognises Mark’s excellent track record built up over many years of managing money at Invesco Perpetual.

When I look back on 2013 I would say that most commentators and investors would have been at least relieved, if not positively surprised, by the performance of the UK equity market and the recovery in the UK economy. The stock market and the economy do not always move in tandem, as valuation for the equity market can be a catalyst for a change in stock market direction without an obvious change in the economy. However in the latter part of last year the two moved together as reports on the state of the economy steadily improved. This improvement is clearly welcome news for equity investors, however with optimism generally more pervasive, it does now imply that much of the turnaround in the fortune of UK corporates is discounted by the market. I would have a similar idea about the pace of activity, as the recently released estimates for Q4 economic growth in the UK annualise at an impressive 2.8%. This implied rate of growth looks likely to be as good as it gets for the foreseeable future.

So what of my approach as I assess the prospects for 2014? As a pragmatic investor who takes a long term view, such recent improvements in the economy and the stock market mean that I will adapt my investment policy, but only moderately so. My approach remains one of identifying companies whose businesses can grow faster than the average of similar corporates through difficult economic scenarios and then turn their growth into a rising stream of sustainable dividends. For instance, I have been a fan of the pharmaceutical sector for some time and remain so.  A combination of ageing populations in the west and increasing wealth in the emerging markets means that the demand for pharmaceutical products is still very strong while the US Food and Drugs Administration now appears to be a lot less restrictive in terms of awarding licences to new products than they were a decade or so ago.  In addition, the major technology changes that are going on in the industry, driven primarily off the mapping of the human genome, are now having an impact. It’s taken up to 15 years for the industry to create products which are driven off biological rather than chemical research and this opens up big opportunities for the pharmaceutical companies I invest in.

There are of course other sectors that share some of these characteristics, i.e. sustainable growing dividends, and that includes the tobacco sector. I believe this sector may well enjoy a better period of relative performance in the months ahead given how the equity market has rallied so strongly over the last couple of years. In terms of new sectors, I am keeping a close eye on the oil sector where I think there are signs that cost cutting and optimised capital expenditure could lead to better returns and dividends.

Finally, if I return to my thoughts to the macro scenario I will be hoping that bank lending will rise to meet a genuine demand for productive investment. The modest amount of credit creation of late is one of my reasons for a more recent cautionary stance. For me therefore, to become more positive, I would need to see a more sustained increase in bank lending across more sectors of the economy and then for real wages to rise, so breaking their recent trend of trailing the cost of living.

Disclaimer

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Where Mark Barnett has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco Perpetual investment professionals.

For more information on our investment trusts, please refer to the Investment Trust ISA and Savings Scheme Key Features and Terms & Conditions and the latest Annual or Half-Yearly Financial Reports. This information is available using the contact details shown.

Issued on behalf of the boards of The Edinburgh Investment Trust plc, the Perpetual Income and Growth Investment Trust plc, Keystone Investment Trust plc and the UK equity portfolio of the Invesco Perpetual Select Trust plc by Invesco Asset Management Limited.

The Invesco Perpetual Select Trust plc may use derivatives for the purpose of efficient portfolio management. There may not be a price correlation between price movements in the underlying securities, currency or index, on the one hand, anduk price movements in the investments, which are the subject of the hedge, on the other. In addition, an active market may not exist for a particular derivative instrument at any particular time.

Invesco Perpetual is a business name of Invesco Asset Management Limited. Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

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