BlackRock Income and Growth focusing on cash generative businesses

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

All information is at 28 February 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 1.18 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.

Commenting on the markets, representing the Investment Manager noted:

Performance Overview:

The Company returned 1.8% during the month, outperforming the FTSE All-Share which returned 1.5%.

The FTSE All Share Index rose 1.5% during the month with Oil & Gas, Telecommunications and Health Care as top performing sectors while Basic Materials and Technology underperformed.

The bigger than expected fall in UK inflation prompted a repricing of Bank of England rate expectations and helped the FTSE 100 to break the 8000 barrier¹ for the first time.

The Oil & Gas sector saw strength despite a flat oil price as holdings including Shell reported better than expected results.

The Bank of England hiked interest rates by 50bps² as expected but signalled it was closer to pausing. This move was matched by the European Central Bank as the Euro area Q4 GDP data showed a marked slowing of growth in the second half of the year and outright contraction in the four largest European economies.

In the US, the annual rate of the personal consumption expenditures (PCE) index rose to 4.6%³ in January, missing economists’ expectations for a moderation to 4.3%. The CPI for January also showed that core inflation is proving persistent and is not consistent with prior market hopes of a quick return to the Federal Reserve’s 2% target. The labour market showed few signs of cooling with the tightness persisting due to a lack of supply, leading to higher job postings. There was a clear services story in the January payrolls report, with the majority of the new jobs created in the services sector. In addition, the S&P Global US Flash Composite purchasing managers’ index (PMI) rose to its highest level since June 2022. These CPI and PMI revisions and the payrolls data showed the tightest labour market in half a century. The Fed went on to deliver a 25bps⁴ hike and asserted “it is only the early stage” of the disinflation process.

Stocks:

Standard Chartered was the top positive contributor to performance during the period. While short term results were a touch weaker on provisions, the shares rose in response a mix of greater optimism from management in achieving their return on equity targets through an expanding net interest margin alongside further bid speculation.

RELX was another top positive contributor; organic growth for 2022 was ahead of expectations as the Risk division continues to compound at a high rate while Legal and STM are benefitting from new product investment in data analytics.

The share prices of Tate & Lyle and Smith & Nephew also rose after both companies delivered strong results.

Watches of Switzerland was a top detractor from performance during the month as the company’s share price fell on the back of their Q3 results. While the sales growth slowed down in Q3 versus H1, this was predominantly driven by jewellery, which fell mainly on the back of the company’s own decision not to discount and to hold its price premium versus competition.

Rio Tinto and BHP also detracted from performance as miners saw general weakness during the period.

Changes:

Trading activity was limited during the period; we reduced positions in British American Tobacco and Moonpig. 

Outlook:

Inflation has consistently surprised in its depth and breadth, driven by 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.

We would expect broader demand weakness as we enter 2023 although the ‘scars’ of supply chain disruption are likely to support parts of industrial capital expenditure 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 Source: Investment Week, February 2023: https://www.investmentweek.co.uk/news/4074541/ftse-100-breaks-historic-barrier#:~:text=The%20FTSE%20100%20has%20broken,8%2C045.89%20at%20time%20of%20writing.

² Source: Bank of England, February 2023: https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/february-2023

³ Source: Financial Times, February 2023: https://www.ft.com/content/87593f86-501d-4e28-ac1f-bb72127bcc7f

⁴ Source: Financial Times, February 2023: https://www.ft.com/content/03b5354d-ad3c-4bfd-b1cc-c64d46dfdf28

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