Securities Trust of Scotland Update – June 2019

Mark Whitehead on opportunities for high-quality companies and the long-term investment implications from climate-related change.

30 May 2019

Market falls and recovery – what next?

Markets have seen a breathtaking start to the year – the S&P 500 saw its worst December since 1931, and then its best January since 1987. Since then markets have climbed higher as some concerns appear to subside. 

Some European data has deteriorated but there is hope of improvement – German GDP could benefit from fiscal boosts coming later in the year, while Spain and Portugal are enjoying a decent recovery in growth. 

Even the UK, despite Brexit, is running at almost maximum employment. And, should Brexit be concluded in the next six months corporates will be able to get back to investing for future growth. Against this backdrop, European valuations look compelling compared with US counterparts – particularly for high yield dividend stocks.

Opportunities for high-quality companies

Global markets have seemingly shrugged off a fall in earnings growth. With strong market moves unlikely from here and bouts of volatility to be expected, I believe this should be a much better backdrop for high-quality, cash-generative businesses which are able to distribute sustainable and growing dividends for investors.

As an income investor, there are a number of interesting areas we are focusing on. For example, in the UK, brick manufacturer Ibstock sees a strong growth opportunity in the demand for new housing in the coming years, with the creation of a new £55 million factory, capable of producing 100 million bricks per year.

From an investor’s perspective, even more than usual, I believe this current environment demands a highly selective stockpicking mentality, with a laser focus on corporate margin pressure and a keen eye on company valuations.

Even long-term implications

It’s now impossible to ignore the implications of global warming, something which, as long-term investors, we’ve been aware of for some time. We need to understand the most material risks to companies’ operating models, as well as the climate-related strategies they have in place to ensure the sustainability of their businesses.

But there are many cases where this necessary change to a lower-carbon environment is enabling opportunities.

For example, Dutch science company DSM, which we’ve mentioned in previous updates is developing a feed additive to reduce greenhouse gas emissions from cattle. DSM’s ‘Clean Cow’ product is being tested in New Zealand and could create a market worth billions – the potential for uptake is definitely significant.