BlackRock Income and Growth Investment Trust reports May 2024 portfolio performance

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

All information is at 31 May 2024 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:

Market Summary:

In May, a rally in global equity markets was fuelled by declining inflation and growing investor optimism about the economic outlook.

The FTSE 100 reached new record highs, outpacing Europe and the US driven by takeover activity, a brighter macroeconomic outlook, and expectations of more buybacks and IPOs¹.

The FTSE 250 also saw spillover effects, returning +4.19% over the month (BlackRock, 31 May 2024). The FTSE All Share rose by 2.41% in May with Telecommunications, Industrials and Financials as the top performing sectors (BlackRock, 31 May 2024).

In the UK, inflation dropped to 2.3% year-on-year, hitting its lowest level since summer 2021, although modestly higher than market and Bank of England (BoE) forecasts of 2.1%². The UK exited a recession in the first quarter, according to the Gross Domestic Product (GDP) data release indicating 0.6% quarter-on-quarter vs. the expected 0.4%³. There were also signs that manufacturing is on an upwards trajectory with industrial production and manufacturing production both rising more than expected. This followed the BoE holding rates at the May Monetary Policy Committee.

In the US, core Consumer Price Index (CPI) decelerated to 0.3% month on month in April, from 0.4% in March and in line with expectations; the S&P 500 and Nasdaq hit record highs as the Federal Reserve (Fed) Chairman Powell pushed back against further rate hikes. The US dollar declined in May amid expectations of one or two Fed rate cuts this year⁴. In Europe, senior European Central Banks policymakers indicated the likelihood of rate cuts despite higher-than-expected inflation of 2.6% year-on-year⁵.

Stock comments:

During the month, Hays share price rallied, positioning it as a leading positive contributor to the portfolio’s performance. Big Yellow’s share price also contributed positively following robust financial results. The Company’s strategic decision to increase development expenditure, after securing funding last year, aligns well with the improving trade conditions. Standard Chartered benefited from the upswing in the financial sector in addition to strong first quarter results.

Conversely, Mastercard’s share price underwent a correction, retracting from its previous highs, which adversely affected the portfolio’s relative performance. A new position for the portfolio, Inchcape, was another detractor despite solid results.  Additionally, Hiscox’s share price witnessed a decline after a period of strength.

Changes:

During the month, we started new positions in several holdings including Inchcape, Great Portland Estates, and Derwent London. In addition, we sold Smith & Nephew.

Following the recently announced sale of its UK retail business, Inchcape will predominantly be an auto distributor. The company represents approximately 60 brands across 40 markets, overseeing the supply of new vehicles and official parts to retailers in smaller markets. Key operational regions encompass South America, South-East Asia, Australia, as well as select European and African nations. While automotive distribution traditionally yields lower margins (operating margin of 6-7%), it is a capital-efficient and cash-generative business model. Inchcape boasts a commendable history of integrating new brands and markets, leveraging its digital and parts capabilities to enhance value further. We are confident in Inchcape’s prospects for a cyclical recovery in several crucial markets, its proven track record of capital allocation, and its intention to utilize £100m from the UK retail proceeds for a share buyback. With an initial valuation of less than 10 times price-to-earnings ratio (P/E), a free cash flow yield exceeding 10%, and a net debt to EBITDA (earnings before interest, taxes, depreciation, and amortisation) ratio of less than 1, we believe the shares present an appealing risk-reward proposition. 

Following the Great Portland Estates (GPE) rights issue to raise £350m we have initiated a position in GPE and Derwent London (DLN); two central London office developers. Both shares trade at 30% discounts to their asset value as higher interest rates and slowing activity in London has pressured values. We believe with interest rates now close to a peak, coupled with a pronounced scarcity in supply precipitating an acceleration in rental growth, a stable to modestly improving UK GDP, and the prospect of political stability post the forthcoming election, this is potentially an attractive entry point to invest further in UK real estate given very attractive absolute valuations.

To fund these new purchases and given the persistent operational challenges and subsequent consistent downgrades, we have sold Smith & Nephew. The significant restructuring within the company has adversely impacted its free cash flow, leading us to seek more advantageous investment opportunities within the UK domestic market. While Smith & Nephew’s shares remain reasonably priced, it is imperative to maintain a competitive capital allocation within the portfolio.

Outlook:

Equity markets entered 2024 in a buoyant mood following a strong and broad rally in the latter part of 2023. The outlook, and optimism, is a far cry from 12 months ago, when supply chains were hugely disrupted, and inflation was double digit and well ahead of central banks’ targets prompting rapid and substantial interest rates hikes despite an uncertain demand environment. China was the surprise negative in 2023, with no noticeable COVID re-opening recovery and lacklustre growth despite government attempts to stimulate.

Markets have shifted to `goldilocks’ territory whereby slowing inflation has signalled the peak for interest rates while broad macroeconomic indicators that have been weak are not expected to deteriorate further. This is also helpful for the cost and availability of credit which has recently improved having been deteriorating through most of 2023. Despite expectations for rate cuts moderating significantly, stock markets have continued to make progress in the developed world. Labour markets remain resilient for now with low levels of unemployment while real wage growth is supportive of consumer demand albeit presenting a challenge to corporate profit margins.

With the UK’s election date now set for July 4th, we continue to expect that geopolitics will play a more significant role in asset markets. This year will see the biggest election year in history with more than 60 countries representing over half of the world’s population going to the polls. While most, such as the UK’s, are unlikely to have globally significant economic or geopolitical ramifications, others, such as the US elections in November, could have a material impact. We believe political certainty will be helpful for the UK and address the UK’s elevated risk premium that has persisted since the damaging Autumn budget of 2022. Whilst we do not position the portfolios for any particular election outcome, we are mindful of the potential volatility and the opportunities that may result, some of which have started to emerge.

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 a robust buyback yield of the UK market. Combining this with a dividend yield of 3.7% (FTSE All Share Index yield as at 30 April 2024 source: The Investment Association), 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, we believe that in the course of time risk appetite will return and opportunities are emerging. We have identified a number of potential opportunities with new positions initiated throughout the year in both UK domestic and midcap companies.

We continue to focus the portfolio on cash generative businesses that we believe offer 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 seeking to identify the companies that strengthen their long-term prospects as well as attractive turnarounds situations.

¹ Reuters, 8th May 2024, https://www.reuters.com/world/uk/astrazeneca-lifts-ftse-100-record-high-boe-rate-decision-tap-2024-05-08/#:~:text=The%20blue%2Dchip%20FTSE%20100,record%20high%20of%2020%2C491.99%20points.

² Financial Times, 22nd May 2024, https://www.ft.com/content/c17be87f-c7ff-426c-9679-18eedb1bdeb6

³ Financial Times, 10 May 2024 https://www.ft.com/content/d8ec3955-d45f-435a-912a-5d12bb556a5b#post-b1961804-5c70-491c-aaa9-6bd0ef56a132

⁴ Financial Times, 15th May 2024 https://www.ft.com/content/ef0028e6-ec29-4521-80fa-2cb6531adb39

⁵ Financial Times, 29th April 2024 https://www.ft.com/content/083b6312-55f7-465c-b63e-a98e7b403eb2

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