BlackRock Income and Growth Investment Trust outperforms FTSE All-Share in November

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

All information is at 30 November 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:

Commenting on the markets, representing the Investment Manager noted:

Performance Overview:

The portfolio returned 5.3% during the month net of fees, outperforming the FTSE All-Share which returned 2.99%.

Market Summary:

November proved a strong market for global equity indices. Continued falls in inflation, combined with further normalisation in the jobs market, has resulted in a rapid and stark change in narrative from higher for longer to peak rates and imminent central bank pivot. This has manifested itself in a sharp fall in the US 10 year, and a broad rally for equities. Consumer Price Index (CPI) data for the month of October was lower than market expectations with inflation sliding to 3.2%¹; the Federal Reserve (Fed) held rates steady, however, maintained hawkish messaging.

Inflation in the Eurozone also fell more than expected to 2.4%², mainly driven by falling energy prices but the European Central Bank (ECB) maintained a cautious view as wage pressures remained strong. In China, retail sales and industrial activity increased more than expected which helped sentiment, however, the property market continued to be a drag on growth and manufacturing activity shrank for a second straight month in November, at a quicker pace.

In the UK, inflation fell sharply to 4.6%³ given lower energy prices. In addition, business activity expanded for the first time since July as the Purchasing Managers’ Index climbed to 50.1⁴. The FTSE All Share rose 2.99% during the month with Technology, Industrials and Financials as top performing sectors.

Next was a top positive contributor to relative performance of the portfolio during the period. The British multinational clothing, footwear and home products retailer posted strong results with like-for-like sales growing by 4% versus guidance of +2%; the company modestly increased fiscal year guidance. Private equity group, 3i, was another top positive contributor to performance. Discount retailer, Action, 64% of 3i’s tangible net asset value (TNAV), continues to perform well.

Taylor Wimpey, the UK home construction company, contributed as the company reported strong Q3 2023 results, with FY23 operating profit now expected to be at the top end of previous guidance given strong pricing and cost control. The company’s management see the short-term market backdrop as uncertain but remain confident in the medium-long term fundamentals from the supply and demand imbalance in the UK housing market.

Reckitt Benckiser, the consumer good company, was a top detractor from relative performance during the period. While results reported at the end of October were in line with expectations, the strategy update was underwhelming with no new targets. After a long period of investment, and against low expectations, we would expect to see an improvement in innovation and sales progression going forward.

Ingredient business, Tate & Lyle reported results were marginally better on profit terms than expected and the company has reiterated its +7-9% EBITDA guidance. The de-stocking in the market has impacted volumes and with some cost deflation pass through, revenue guidance was modestly lowered. The momentum in solutions/innovation continues with growth of 11%. Shares in utility company, Centrica have had a strong run this year. More recently, the share price fell back due to profit taking towards year-end.

Changes

We reduced the portfolio holding in Ashtead. The industrial equipment rental company had a warning delivering 2-3% lower revenue growth against expectations, blamed on fewer adverse weather events and on the actors/writers strike; with higher depreciation and interest costs this translates into a double-digit EPS downgrade.

Outlook

During the course of 2023, central banks continued to unwind ten years of excess liquidity by tightening monetary policy desperate to prevent the entrenchment of higher inflation expectations. Inflation has persisted, driven by resilient demand, supply chain constraints and rising wages. Developed market central banks have responded with aggressive interest rate increases with eleven rate hikes in the US and fourteen in the UK so far. Despite these steep rate rises, the transmission of higher interest rates and lower liquidity into the global economy has been slow. March 2023 saw the first signs of financial stress with the bankruptcy of Silicon Valley Bank and Signature Bank in the US contributing to a steady deterioration in the availability and cost of credit. This has had a notable impact in specific industries, e.g. biotech, yet, so far, the broad economic impact has been limited. As we approach `peak interest rates’, the key question facing markets is whether we will see a soft or a hard landing as the overall effects of this monetary tightening feed into the economy.

Whilst difficult to predict, and the sectors may vary, we would expect some broader demand weakness into 2024 as the impact of interest rate rises is felt by the economy.  The third quarter of 2023 reporting season saw a broadening of demand weakness as consumers began to tighten their spending habits post summer and as excess savings built up during COVID-19 are depleted. Meanwhile industrial companies continued to build backlogs at a slower pace than revenues as supply chains normalised leading companies to destock as their need for excess inventory receded. To guard against lower credit availability and the potential for higher rates for longer, our approach continues to focus on companies with robust balance sheets capable of funding their own growth. We also continue to believe that identifying companies with real pricing power will be a differentiator. As demand weakens and the transitory inflationary pressures continue to fade (e.g. commodity prices, supply chain disruption) then pricing conversations will become more challenging even though wage pressure may prove more persistent. While this does not bode well for margins in aggregate, we believe that 2024 will see greater differentiation as pricing power of companies will become critical.

The UK’s policy during the early part of 2023 diverged from the G7 in fiscal policy terms as the UK government attempted to create stability after the severe reaction from the “mini-budget” in October 2022. Thereafter, the UK rate policy mirrored others although towards the end of the period the fall in the oil price and the annualisation of previous year’s rate rises combined to meaningfully lower inflation to below 5% bringing the UK back in line with the G7.   As we have commented several times before, the UK stock market continues to remain depressed in valuation terms relative to other developed markets offering double-digit discounts across a range of valuation metrics. This valuation `anomaly’ saw further reactions from UK corporates with the buyback yield of the UK, at the end of the period, standing at a respectable c.2.5%. Combining this with a dividend yield of c.4%, the cash return of the UK market is attractive in absolute terms and comfortably higher than other developed markets. Although we anticipate further volatility ahead as earnings estimates moderate, we know that in the course of time, risk appetite will return, and opportunities are emerging. As we have stated above, we have identified a number of opportunities with new positions initiated throughout the year in both UK domestic and midcap companies.

We expect geopolitics to continue to be a source of volatility with potentially significant elections in Taiwan, the USA and the UK as well as the impact of resolution or escalation of geopolitical conflicts globally.

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

¹Source: Financial Times – US stocks and bonds jump after inflation falls to 3.2%

² Source: Financial Times – Eurozone inflation falls more than expected to 2.4%

³ Source: Financial Times – UK inflation slows sharply to 4.6%

⁴ Source: Financial Times – UK business activity grows marginally in November

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