BlackRock Income and Growth outperforms FTSE All-Share in January (BRIG)

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

All information is at 31 January 2023 and unaudited.

For more information on the BlackRock Income and Growth Investment Trust, 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 4.97 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 3.8% and includes the 2022 interim dividend of 2.60p per share declared on 22 June 2022 with pay date 1 September 2022 and the 2022 final dividend of 4.70p per share declared on 1 February 2023 with pay date 15 March 2023.

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

**** The Company’s ongoing charges are calculated as a percentage of average daily net assets and using management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items for the year ended 31 October 2022.

BlackRock Income and Growth Investment Trust Manager noted:

Performance Overview:

The Company returned 5.3% during the month, outperforming the FTSE All-Share which returned 4.5%.

Global equity markets had an exceptionally strong start to 2023, unwinding some of the 2022 year-end moves. Optimism for a dovish stance from central banks, combined with lower energy prices and a potential boost from China’s accelerated reopening saw some exceptional price moves, with the Nasdaq posting its best January performance since 2001. Bond yields fell and “risk on” sectors rose, whilst sectors that proved resilient in 2022 underperformed.

In the US, the dominant market narrative shifted from recession to soft-landing. Both headline and core inflation eased as goods prices fell further than the market expected and core services excluding shelter surprised on the downside. On the other hand, jobs growth slowed further but still showed resilience as the unemployment rate fell unexpectedly, reverting to a historic low. Labour costs slowed for the third consecutive quarter though, signalling that wage inflation is potentially starting to roll over despite a tight labour market, adding further fuel to the fire that interest rate hikes are nearing the peak.

Europe returned to growth for the first time since mid-2022 as the composite Purchasing Managers’ Index (PMI) rose for a third consecutive month. This showed that activity was improving, led by services, as the energy shock relented and further reinforced the European Central Bank’s resolve of further monetary tightening. This rise in Eurozone PMI contrasted with an unexpected deterioration in the UK, where the corresponding index recorded the sharpest decline in activity in 2 years. Another factor that fuelled confidence was the fact that the mild winter in Europe has meant European higher gas storage in 2021.

In China, Q4 2022 GDP beat depressed expectations after the zero-Covid policy was suddenly eased. The economy is expected to rebound in 2023 as domestic consumption and investment are expected to pick up with Chinese households having accumulated over USD 2.6 trillion¹ of bank deposits in 2022.

The FTSE All Share rose 4.5% during the month with Consumer Services, Telecommunications and Financials as top performing sectors while Health Care and Consumer Goods underperformed.

Stocks:

3i was the top contributor to relative portfolio performance as the company delivered strong results with discount retailer Action performing very well over the Christmas period. This drove a significant increase in 3i’s NAV which positively surprised against modest expectations. Consumer facing names including Whitbread and Howden Joinery also performed well as the market continued to be positively surprised by consumer spending holding up over the Christmas period. BHP also contributed to relative performance as markets sought Chinese exposure given the economy’s re-opening post the end of Covid lockdowns.
Pearson was a top detractor from relative performance during the month; the company was a very strong performers during 2022 and January saw some consolidation in its share price. Rentokil was modestly weaker during January as investors rotated into cyclicals. Similarly, other defensive holdings including Reckitt Benckiser and Smith & Nephew also detracted for the same reason. 

Changes:

During the period, we purchased Swiss pharmaceutical company, Roche. Following a period of underperformance,  we view the company as having an attractive valuation supported by a strong balance sheet. We also purchased NatWest as banks continue to see meaningful upgrades in the rising interest rate environment. We sold Equifax, Kone and Whitbread following strong recent performance. Whilst Kone and Equifax have been relatively recent additions, purchased in the second half of 2022, we have been pleasantly surprised by the early strong performance. Both share prices reached levels where we felt their prospects were well understood and consequently saw better value elsewhere. 

Outlook:

As we look ahead into 2023, the headwinds facing global equity markets are evident. Inflation has consistently surprised in its depth and breadth, driven by the resilient demand, supply chain constraints, and most importantly by rising wages in more recent data. Central banks across the developed world continue to unwind ten years of excess liquidity by tightening monetary policy desperate to prevent the entrenchment of higher inflation expectations. Meanwhile, the risk of policy error from central banks or politicians remains high as evidenced by the turmoil created by the ‘mini-budget’ in the UK that sent gilts spiralling. The cost and availability of credit has changed and strengthens our belief in investing in companies with robust balance sheets capable of funding their own growth. The rise in the risk-free or discount rate also challenges valuation frameworks especially for long duration, high growth or highly valued businesses. 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. We are conscious of the impact this has 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. We also see the potential for longer-term inflationary pressure from decarbonisation and deglobalisation, the latter as geopolitical tensions rise more broadly across the world.

As we enter 2023, we have seen the first signs of demand weakness, notably in areas of consumer spending impacted by rising interest rates such as demand for new housing.  We would expect broader demand weakness as we enter 2023 although the ‘scars’ of supply chain disruption are likely to support parts of industrial capex demand as companies seek to enhance the resilience of their supply chains. A notable feature of our conversations with a wide range of corporates has been the ease with which they have been able to pass on cost increases and protect or even expand margins during 2022 as evidenced by US corporate margins reaching 70-year highs. We believe that as demand weakens and as the transitory inflationary pressures start to fade during 2023 (e.g. commodity prices, supply chain disruption) then pricing conversations will become more challenging despite pressure from wage inflation which may prove more persistent. While this does not bode well for margins in aggregate, we believe that 2023 will see greater differentiation as corporates’ pricing power will come under intense scrutiny.

The UK’s policy has somewhat diverged from the G7 in fiscal policy terms as the present government attempts to create stability after the severe reaction from the “mini-budget”. The early signs of stability are welcome as financial market liquidity has increased and the outlook, whilst challenged, has improved. Although the UK stock market retains a majority of internationally weighted revenues, the domestic facing companies have continued to be impacted by this backdrop, notably financials, housebuilders and property companies. The valuation of the UK market remains highly supportive as currency weakness supports international earnings, whilst domestic earners are in many cases at COVID or Brexit lows in share price or valuation terms. Although we anticipate further volatility ahead as earnings estimates moderate, we know that in the course of time, risk appetites will return and opportunities are emerging.

We continue to focus the portfolio on cash generative businesses with durable, competitive advantages boasting strong leadership as we believe these companies are best-placed to drive returns over the long-term.  We anticipate economic and market volatility will persist in 2023 and we are excited by the opportunities this will likely create by identifying those companies using this cycle to strengthen their long-term prospects as well as attractive turnarounds situations

¹ Financial Times – China’s record $2.6tn rise in savings fuels ‘revenge spending’ hopes

For more information on the BlackRock Income and Growth Investment Trust, please visit: www.blackrock.com/uk/brig