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Job Curtis: The pockets of UK value I’m taking advantage of

20 July 2017

The manager of the £1.6bn City of London investment trust tells FE Trustnet why he is positive on the macroeconomic backdrop but remains cautious on the valuation of equities.

By Lauren Mason,

Senior reporter, FE Trustnet

The fall in sterling and a supportive yield environment means the backdrop for UK equities is positive, according to Henderson’s Job Curtis (pictured). However, he warned that the P/E ratio of the market is extended and he has therefore reduced the gearing of his £1.6bn City of London investment trust.

While he said finding opportunities in a maturing bull market environment is becoming increasingly difficult, he is nevertheless seeing pockets of value across a number of unloved sectors. 

“The P/E is still quite extended. I’ve been a bit cautious on the market, the gearing of the trust has come down – it was on 8 per cent at the end of last June and a year later it’s down to 5.5 per cent, which is the lower end of the range,” Curtis explained.

“That said, the market environment is still quite supportive. I never thought interest rates would go down from 0.5 per cent but they have gone down to 0.25 per cent, so I think the yield environment remains very supportive.

“The dividend yield on UK equities is around 3.5 per cent, which is way above 10-year gilts yielding 1.3 per cent. I feel the market is a bit expensive on a P/E view but on a yield view, it’s well supported.”

Another reason Curtis is positive on the backdrop for the UK is value of sterling, which plummeted following last year’s Leave vote in the EU referendum.

Performance of currency vs US dollar

 

Source: FE Analytics

While it perhaps feels as though the currency has found a base, the manager said there could still be further downside depending on ongoing Brexit negotiations.

“It is quite a big devaluation in terms of British history and it’s come through with our rising prices,” he said. “Inflation recently reached 3 per cent on CPI and I think the consumer is feeling more of a squeeze as a result.

“One of the reasons for the dissatisfaction which resulted in Brexit, the election results and Trump in America is the stagnation of wage growth, and this isn’t just in the UK of course.

“But the fall in the pound is very good for the UK stock market as over 70 per cent of profits come from overseas and the companies get an immediate translation benefit from the fall in the pound.”


Another positive, Curtis pointed, is out that brokers’ 2017 estimates for corporate earnings growth have been rising for the first time in several years.

“When we look at the P/E being somewhat elevated, the fact that earnings estimates have come in quite well I think is positive actually. I think it reflects global growth,” he reasoned.

Given Curtis’ positive views on the macro backdrop, combined with his less-than-positive views on market valuations, he is seeking new opportunities within a number of badly-bruised domestic-facing sectors.

One example is retail which, following the rise in e-commerce and the aforementioned consumer squeeze, has become particularly unloved among many investors.

“There is intense pessimism about the prospects for retailers and I think, to some extent, that is well-founded because you have Amazon as a very ferocious competitor and I think that’s a key negative influence on the sector. Online operators are proving to be very disruptive,” the manager said.

“Having said that, some of the valuations of retailers are very depressed and you do question whether they’re discounting a lot of bad news already.

Performance of indices over 1yr

 

Source: FE Analytics

“One I’ve bought is Dixon Carphone, which yields 4 per cent. It has had to live with Amazon for many years and it has about 25 per cent of the market in terms of televisions and mobile phones.”

However, Curtis has only bought a small holding given the structural factors bearing down on the UK retailers.

He also has a modest holding in Sainsbury’s, which again has been negatively impacted by overarching investor sentiment towards the sector. However, the manager said its acquisition of Argos has increased the company’s earning potential while allowing it to reduce its overall capex and move all Argos stores in-branch.  

“The jury’s still out and it’s probably one of the toughest areas of all because you have Aldi and Lidl at the bottom end of the market, as well as Amazon threatening to come in. But I think it looks like an interesting deal,” Curtis said.


Another area of the domestic-facing UK market Curtis likes is pub groups. Along with retailers, another potential headwind for this sector is the introduction of the National Living Wage, which will be fully phased in by 2020.

“Greene King is my biggest holding in this area – it has been quite acquisitive but it’s a well-managed company. Again, that might be another situation where the pessimism is already in the share price,” he explained.

“Sometimes, when there’s intense pessimism, it gets reflected in share prices and if it turns out not to be quite as bad as people think, you can actually make very good gains.

“People were incredibly pessimistic about tobacco shares 20 years ago and they’ve proved to be good investments, so you can find your good returns in the most unlikely places. I would suggest retailing is one area where you need to tread carefully but there could be some quite interesting bargains out there.”

 

Curtis has been at the helm of The City of London investment trust since 1991. Over the last 10 years, the trust has outperformed its average peer and MSCI United Kingdom benchmark by 57.65 and 56.58 percentage points respectively with a total return of 116.87 per cent.

Performance of trust vs sector and benchmark over 10yrs

 

Source: FE Analytics

Had an investor placed a £10,000 into the trust at the start of this time frame, they would have received £4,502.84 in income payouts.

The trust is trading on a 1.3 per cent premium, yields 3.9 per cent and has ongoing charges of 0.43 per cent.  

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