Investors have every reason to be optimistic about the UK stock market following its heavy de-rating in the wake of the EU referendum. That was the message from Ciaran Mallon, manager of Invesco Income Growth Trust, when he spoke at a Sub35 event in London’s Shoreditch.
“I invest in the equity market and that is the world for optimists – it’s all about the future,” he said. “When you buy a share, you get next half’s dividend and maybe the full year dividend, and that’s maybe 3-4% of what you invest, so it’s all about the future. You’ve got to think about the future and be optimistic about the future to buy shares.”
The world of bonds, on the other hand, is the world for pessimists. “The absolute best-case scenario for bond investors is that the bond does what it says it will do; you’ll get the interest and the principal. And all you do is worry that you won’t get that.”
Opportunity in difficulty
He points to sentiment towards the UK stock market being “quite pessimistic”; the valuation of UK domestic shares suggest that investors are pricing in a recession.
“If you compare it to real GDP [gross domestic product] back through time, it looks quite anomalous. The shares are expecting a recession and there quite possibly won’t be a recession. In fact, that would be quite unlikely.”
Mallon pointed to an analysis of company revenues around the world, which shows companies that derive a significant proportion of their revenues from the UK have de-rated since the referendum.
He, however, is backing Britain. He is overweight UK and US revenues relative to the FTSE All-Share index, while being underweight earnings from Europe and the rest of the world.
Mallon illustrated his point by drawing on a quote often attributed to Winston Churchill: “The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty.” This, he later established, was said by Bertram Carr, of the Carr’s water biscuit family – a lesson in checking sources of information.
Since 2014, Invesco Income Growth has generated more income than it paid out – adding to its revenue reserves. In 2013, it dipped into reserves to pay its dividends to shareholders. This facility has enabled it to steadily grow its dividend ahead of inflation.
“When the market was cutting its dividends in aggregate, the investment trust was able to growth its dividend through that,” said Mallon. “It made use of its revenue reserves earlier in the period and it’s ready for a tougher time in future. This is something that a unit trust can’t do, but an investment trust can do, because it’s a company.”