What this chart shows
This shows how the UK investment trust market (excluding 3i) has moved to varying degrees of discount over the last 20 years. By the term ‘discount’ we are referring to where the share prices are in relation to their underlying Net Asset Value (NAV). Clearly, certain economic and geopolitical events have had a significant influence on the sector’s valuation by the market.
Share price discounts are inherently cyclical, however what we can see is that the periods of significant widening of discount tend to be relatively short, followed by a longer-term grind upwards with discounts narrowing closer to ‘Par’. However, the current period of widening the sector has experienced has been somewhat more protracted.
Why this is important
The factors that drove the sector in to the current de-rating were:
· higher interest rates causing investors to worry about large falls in Net Asset Values as NAVs are partially pegged to bond yields especially in the ‘real assets’ spaces such as property and infrastructure.
· the UK equity market being significantly out of favour with investors selling their exposure via index Exchange Traded Funds. As investment trusts account for c. 25% of the FTSE-350 index, outflows from the UK market create forced selling regardless of the price of investment trusts.
· previously applied ‘cost disclosure’ rules placed upon investment trusts made them look more expensive than they actually were, therefore deterring buyers and creating forced sellers mindful of UK Consumer Duty assessments.
The confluence of those factors created a significant headwind for the sector. However, bond yields are now easing back; the UK equity market, partly due to its very low valuation, is attracting international money and the FCA has communicated forbearance on the ‘cost disclosure’ rules which will be laid down in law by the UK Treasury in its forthcoming Statutory Instrument on PRIIPs.
In essence therefore, the factors that got us here are now passing into the rear-view mirror. We believe that the road ahead presents a rare means to participate in profitable mean reversion.
In the week ending 18 October, emerging markets are becoming increasingly attractive to investors, reflecting a shift in global economic focus amidst persistent geopolitical challenges.
US
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Retail sales unexpectedly increased by 0.4% in September, up 0.1% from the prior month and the third consecutive monthly increase
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The Philadelphia Federal Reserve Manufacturing Index, a significant indicator of general business conditions in the region, surged to 10.3 in October, surpassing all expectations. Any reading above zero indicates improving conditions. The Empire State Index, a similar gauge of factory activity in New York, showed business activity contracted in October after a large improvement in the previous month
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Concerns are rising among US banks about potentially reducing interest payments on corporate deposits to protect profit margins
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Political uncertainties are creating fragile confidence in economic recovery, affecting business and consumer sentiment
UK
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Chancellor Rachel Reeves is preparing for a significant Autumn Budget aimed at closing a £40 billion funding gap, which may involve tax increases
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Inflation eased to 1.7% in September, increasing the likelihood for further interest rate cuts
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British retail sales rose for the third consecutive month, surpassing expectations, defying expectations of a slowdown
Europe
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The European Central Bank lowered interest rates to 3.25%, indicating a strategy to combat slowing inflation
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Concerns remain over rising food prices, which overshadow improvements in headline inflation figures
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The Eurozone’s economic outlook is mixed, with some signs of recovery but persistent risks from global economic pressures
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The euro fell to a two-month low against the dollar as market expectations of further rate cuts grew
Rest of the World/ Asia
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China’s economy grew by 4.6% year-on-year in Q3, its slowest pace since early last year and slowing from 4.7% in Q2
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The Japanese yen continued its decline, falling below ¥150 against the US dollar as market participants doubt the Bank of Japan's commitment to interest rate hikes
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Emerging markets are witnessing a surge in investment interest as global financial conditions evolve
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Global commodity prices are fluctuating due to geopolitical tensions, affecting various economies differently