BlackRock BRIG August NAV outperformed the FTSE All-Share

BlackRock Income and Growth Investment Trust plc (LON:BRIG) has announced its latest portfolio update.

All information is at 31 August 2022 and unaudited.

For more information on the BlackRock Income and Growth Investment Trust and how to access the opportunities resented by the income and growth sector, please visit: www.blackrock.com/uk/brig

Performance at month end with net income reinvested

BlackRock took over the investment management of the Company with effect from 1 April 2012.

At month end

Sterling:

^* Includes net revenue of 3.44 pence per share

** The Company’s yield based on dividends announced in the last 12 months as at the date of the release of this announcement is 3.7% and includes the 2021 final dividend of 4.60p per share declared on 13 January 2022 and paid to shareholders on 17 March 2022, and the 2022 interim dividend of 2.60p per share declared on 22 June 2022 with pay date 1 September 2022.

*** excludes 10,081,532 shares held in treasury.

**** Calculated as a percentage of average net assets and using expenses, excluding performance fees and interest costs for the year ended 31 October 2021.

Commenting on the markets, representing the Investment Manager noted:

Performance Overview:

The Company returned -1.6% during the month, modestly outperforming the FTSE All-Share which returned -1.7%.

Global equity markets fell in August as the global economy and policymakers faced a sharper inflation-growth trade-off. Equity markets initially moved higher in the first half of the month as they priced in a slowing Fed hiking cycle on a softer-than-expected US CPI inflation then fell later when both the Fed and ECB made it clear that there is more tightening to come.

In the US, headline CPI including food and energy is still running at a near four-decade high of 8.5%¹ with continued concern that inflation is becoming embedded in expectations and thus more persistent. Meanwhile in Europe, markets fell as another looming interruption to Russian gas supplies hit the region; raising the prospects of recession and energy rationing.

The Bank of England hiked rates 50bps to 1.75%², its largest hike in almost three decades. UK inflation hit double-digit figures for the first time in four decades, mainly driven by a combination of supply shocks pushing up core inflation. This prompted the market to price in a more urgent pace of Bank of England rate hikes.

China reported disappointing economic data and reduced consumer confidence due to uncertainty around renewed lockdowns as part of its zero-Covid policy. The People’s Bank of China cut the medium-term lending rate for one-year loans, by 10bps to 2.75%³ in an effort to spur economic growth.

The FTSE All Share Index returned -1.70% for August. The worst performing sectors included Health Care, Utilities and Industrials, conversely, Technology and Oil & Gas sectors had the strongest performance.

Stocks:

RS Group was a top positive contributor to relative performance of the Company during August. The company’s share price had been supported by good results in July and later the announcement of a small acquisition in early August. Pearson posted a very strong set of interim results and announced a new £100m cost efficiency programme leading analysts to upgrade medium term forecasts by 10-20%. We feel the management turnaround is beginning to show real traction with emphasis shifting away from the legacy textbook business to the stable growth, highly cash generative core where we see material value. In the next 12 months we anticipate several new digital product launches which we expect to be accretive to growth. The share price of Standard Chartered rose after the company reported strong results at the end of July. The company also benefitted from rising interest rates and contributed positively to returns of the Company during August.

Sanofi was a top detractor from relative performance during the month due to the recent concerns on litigation around the recalled drug Zantac. Zantac is a product that Sanofi had owned and disturbed for two years. It is yet unclear whose legal liability this is going to fall through as there were a number of pharmaceutical companies which have been distributing this product. This is likely to takes years to resolve and the share price has been weak on the initial news. RELX was another top detractor from relative performance during August. Shares sold off in response to a policy memo from the White House Office of Science and Technology seeking to make federally funded research papers publicly available with no embargo. While this policy move represents risk of c.1.5% of RELX’s revenue and profits, we expect the outcome to be more benign given the value institutions see in the publishing and peer review process. Taylor Wimpey also detracted from relative performance. The housebuilding sector underperformed along with other consumer facing cyclicals on consumer income pressure and in response to rising mortgage rates. While house prices have thus far remained robust, build cost inflation remains a headwind.

Portfolio Activity:

During August, we sold the portfolio holding in Sanofi given our concerns around the aforementioned litigation. We reduced Drax and added to Ashmore.  

Outlook:

The headwinds facing global equity markets have grown steadily over the first half of 2022. Inflation has surprised in its depth and breadth driven by ongoing COVID related disruption, the war in Ukraine, rising labour costs and the persistence of these factors. Central banks and governments are tightening monetary and fiscal policy as interest rates rise and stimulus is withdrawn. The subsequent rise in the risk-free or discount rate has many consequences, not least the pressure on valuation frameworks. We are mindful of this and feel it is incredibly important to focus on companies with strong, competitive positions, at attractive valuations that can deliver in this environment.

The political and economic impact of the war in Ukraine has been significant in uniting Europe and its allies, whilst exacerbating the demand/supply imbalance in the oil and soft commodity markets likely pushing inflation higher for longer. We are conscious of the impact on the cost of energy, and we continue to expect divergent regional monetary approaches with the US being somewhat more insulated from the impact of the conflict, than for example, Europe. Complicating this further, is the continued impact COVID is having on certain parts of the world, notably China, which has used lockdowns to control the spread of the virus impacting economic activity during the first half. We also see the potential for longer-term inflationary pressure from decarbonisation and deglobalisation. It is difficult to have a high degree of confidence in how these evolve but we believe there is rising risk of a policy mistake as central banks attempt to curb inflation; too late to tighten and/or tightening too hard. We expect this, and the geopolitical ramifications of the Ukraine war, to be the prevailing debate of 2022 and beyond.

Although demand remains strong at present, the outlook for corporate revenue and earnings growth is likely to worsen over the course of 2022 as the pressure on real incomes raises the spectre once again of stagflation. A notable feature of our conversations with a wide range of corporates in 2021 was the ease with which they were able to pass on cost increases and protect or even expand margins. We believe that when the transitory inflationary pressures start to fade (e.g. commodity prices, supply chain disruption) then pricing conversations will become more challenging. We are also increasingly focused on wage inflation which may be more persistent and yet, in our experience, harder to pass on. Corporates have already pointed to wages picking up, the introduction of bonuses and growing pressure on employee retention rates as competition for labour intensifies. We therefore believe that employee retention will be an important differentiator in 2022 given the productivity benefits of a stable workforce as labour market tighten further.

The FTSE 100, with a majority of international weighted revenues, high commodity weighting and low starting valuation, has proven to be a port in the storm, as one of the best performing developed markets during the first half. The FTSE 250, with its higher domestic focus and lower liquidity has suffered given the weakness in the domestic economy. We would expect the FTSE 100 to continue to be advantaged until we see a stabilisation in the domestic economy and subsequent strengthening of sterling or, more likely, a weakening of the dollar. Whilst we anticipate further volatility ahead as earnings estimates moderate, we know that in the course of time, risk appetites will return. We are currently spending time identifying our ‘wish list’ of opportunities utilising our flexible approach, experience and strong absolute valuation framework.

As a reminder, we continue to concentrate the portfolio on businesses with pricing power and durable, competitive advantages as we see these as best placed to protect margins and returns over the medium and long-term. Further, we continue to have conviction in cash generative companies with exceptional management teams and underappreciated growth potential. At present, whilst we are excited by the attractive stock-specific opportunities on offer, we continue to approach the year with balance in the portfolio.

20 September 2022