BlackRock Income and Growth Investment Trust strengthening long-term prospects

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

All information is at 29 February 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:

Performance Overview:

The portfolio returned -0.9% during the month net of fees, underperforming the FTSE All-Share which had returned by 0.2%.

Market Summary:

The FTSE All Share Index rose by 0.2% with Industrials, Consumer Services and Technology as top performing sectors. Strong US technology company earnings lifted stock markets globally and a rally in chipmakers helped Japan’s Nikkei set a record high for the first time since 1989.

In the UK, data revealed that the country fell into technical recession last year and Consumer Price Index (CPI) data showed that inflation was still well above the Bank of England (BOE) 2% target. The United Kingdom Manufacturing Purchasing Managers’ Index (PMI) increased in the month of February, marking a 10-month high. Input costs and selling prices grew modestly, with the latter reaching a five-month high, tempering rate cut expectations from investors.

In the US, apart from strong earnings reports, inflation eased in January with the Personal Consumption Expenditures (PCE) falling which supported expectations of interest rate cuts later this year. The labour market continued to be strong as the economy added 353,000 jobs in January¹. In Europe, Purchasing Managers’ Index (PMI) data showed that the economy was still contracting. Inflation in the region’s two largest economies – Germany and France – fell to its lowest level since mid-2021, but services remained sticky and continued to raise concerns for the European Central Bank (ECB).

Stock comments

Reckitt Benckiser was the top detractor after the consumer goods company reported disappointing full year results including an accounting anomaly relating to the overstatement of net revenue in their Middle Eastern division. Rio Tinto and BHP also detracted due to weakness in the price of iron ore as investors’ concerns regarding China’s growth persist. 

Smith & Nephew reported mixed results and the medical equipment manufacturer was another top detractor from performance of the Fund. US Orthopaedics continues to struggle in Q4 with knees -3.8%, hips +1.1% and an impairment of $109m for Engage’s partial knee products which were acquired only in January 2022 but have been subject to a recall. Non-US Orthopaedics was much better (knees +14%, hips +7%), however, there is still much to do here to improve product availability. The other divisions are performing well with Sports Medicine the star despite headwinds in China and Wound also delivering, driven by Bioactives and Negative Pressure. 

Information and analytics company, RELX was one of the largest positive contributors to performance after the company reported full year results that were ahead of expectations. Mastercard continued to see share price strength after reporting strong results earlier in the year and shares in Standard Chartered re-rated on better-than-expected reported earnings.

Changes

During the period, we sold Centrica. The shares have done well since we initiated the position, however the investment case from here is more complicated as earnings normalise. We are using the proceeds to fund better ideas elsewhere in the portfolio. 

We also added to HSBC and NatWest and reduced Smith & Nephew and Watches of Switzerland.

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. Despite this, equities had one of their best years on record outperforming bonds with double digit increases, in dollar terms, across most of the developed world and some emerging markets. In the US, the Nasdaq was the standout rising by 54% driven by the largest seven companies that rebounded strongly (+c.70%) after a poor 2022, when they had fallen by 39% as a group. The FTSE All Share had returned by 7.9% in 2023. 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 been recently improving having deteriorated through most of 2023. During December, bond markets had begun to price in 130bps of easing in the US and a not dissimilar amount in the UK and Europe. Whilst not unrealistic, we believe that this quantum of cuts may prove overly aggressive without a significant deterioration in the economy. Notably, the BoE remains staunchly hawkish as their recent meetings showed. 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.

Notably in 2024, 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, c.4 billion people, 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 may 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.

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 2023, 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 in previous commentaries, we have identified a number of 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 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, 2 February 2024. https://www.ft.com/content/34bd389f-f44d-42d8-b5d6-31fe34ea30c6

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