Abrdn managers outline challenges in big election year

Abby Glennie

The managers of Abrdn investment trusts around the world have outlined the challenges facing investors in 2024 as almost half the world’s population vote in general elections.

In an outlook update, the managers addressed the low valuations of “cheap” UK shares, the “constantly shifting sands of global macro-economic fundamentals” and “broad-based growth across Asia.”

Edinburgh-based Abrdn has assets under management and administration (AUMA) of more than £500 billion.

Abby Glennie and Amanda Yeaman are the investment managers of the £420 million Abrdn UK Smaller Companies Growth Trust plc, that looks to achieve long term capital growth via investment in UK quoted smaller companies.

They wrote: “Although last year’s short-lived technical recession has been confirmed, data on both household incomes and savings ratios in the UK remains positive.

“Meanwhile, the prospect of interest rate cuts and the relatively low valuation of UK equities should offer the opportunity for sustained gains, particularly among small- and mid-cap companies.

“Cheap valuations have not proved sufficient in their own right to drive sustainable moves in UK markets or encourage significant inflows but, combined with looser monetary policy, the outlook could improve.

“While equity indexes have historically risen once interest rates start falling, the economic environment will remain difficult for companies for a period after the initial cuts, something that is likely to be reflected in challenging trading conditions.

“This is the time in the cycle, therefore, to stick to quality companies: they are more likely to be successful in navigating more difficult macroeconomic conditions and should be well placed to defend their earnings as a result.

“At the same time, almost half the world’s population is expected to be asked to vote in general elections in 2024. For UK-based investors, polls in Britain and the US are particularly relevant, and the outcome in the latter remains especially difficult to predict.

“As we move through the summer, expect increasing deliberations over what differing scenarios may mean for financial markets.

“The importance of the American presidential election has been further increased now that the US is the chief driver of global growth in light of waning Chinese influence.

“Meanwhile, if there is a change of government in the UK, as is expected, it will be vital that the new administration acts to retain the confidence of investors, especially those who are based overseas and who represent ownership of around 53% of UK equities.”

Amanda Yeaman

Iain Pyle, investment director of the £105 million Shires Income trust that looks to invest in “high-quality investments for a high, regular income” wrote: “It was very encouraging to see the UK market outperform strongly in the last month and there, at last, seems to be more interest from international investors.

“While valuation in itself should be enough to trigger interest, a genuinely large-cap corporate bid such as the BHP for Anglo American proposal is certainly helpful in attracting attention and raising awareness of how cheap UK equities remain.

“The UK is on about a 40% discount to the rest of the world on price to book value, yet its return on equity has recently improved to be in line with the global average, i.e. the valuation discount is unjustified.

“There is still a long way to go though. Outflows from the UK have been persistent since 2016, and even this month they have remained negative.

“Decisions by asset allocators such as Coutts to continue shifting away from the UK despite the valuation shows that the structural drag is not yet completely done for some.

“That de-allocation does leave a low bar for any improvement though: even UK pension funds are underweight the UK, and moving back in line would create significant buying pressure.

“Additionally, it is notable that April’s rally only really helped the large cap names – the small and mid cap parts of the UK lagged behind and continue to look even cheaper.

“From a trust perspective, Shires is a levered play on the low valuation of UK equities, given the high discount to an NAV which is based on already discounted equity valuations.

“While we can debate the reasons for that double discount, it works in the favour of anyone looking for income, as the discount enhances the effective yield on the shares for any buyers. With the potential for income growth as well, that remains a compelling opportunity.”

Samantha Fitzpatrick

Samantha Fitzpatrick is co-manager of the £1.6 billion Murray International Trust that looks to invest in a “high conviction global portfolio built with the potential to grow capital and deliver a strong and rising income.”

Fitzpatrick wrote: “The constantly shifting sands of global macro-economic fundamentals have once again perfectly illustrated the futility of trying to predict the economic future.

“What was ‘consensus’ as recently as six months ago has all but been torn up and confined to the waste paper bin. So is it really worth subscribing to more of the same which is likely to suffer the same fate in six months time?

“Perhaps of more practical value is to consider the outlook for the fifty odd portfolio companies that are tasked with delivering the Trust’s key investment objectives for the next few years and beyond.

“A well balanced blend of growth and income opportunities deeply diversified over twenty two countries and significantly more end markets provides the bedrock for capital and dividend growth at what are currently adjudged to be attractive valuations.

“Scope exists for such positive corporate dynamics to be further boosted by favourable macro-economic trends, particularly evolving throughout the emerging world, but critically this is not deemed to be essential for delivering desired results.

“A world without free money and a market-based repricing of ‘real’ bond yields suggests that contributions from income and dividends are likely to reclaim their lion’s share significance in financial total returns going forward.

“The fully diversified growth and income portfolio remains positioned to capitalise on such evolving circumstances.”

Gabriel Sacks is portfolio manager of the £540 million Abrdn Asia Focus fund that holds a “fundamental, high conviction portfolio of well-researched Asian small caps.”

Sacks wrote: “We continue to be positive on the outlook for Asian small caps. Rates and inflation have likely peaked in the US setting the scene for rate cuts in Asia, though the performance of the companies in the portfolio is not reliant on that development.

“The outlook is potentially bright due to the broad-based growth across Asia and the fundamental strength of the companies in the portfolio which are typically leaders in the industries or markets in which they operate.

“Furthermore, the turnaround in the IT and semiconductor cycle, the green transition and near-shoring trends as a result of geopolitics continue to benefit some companies and countries in Asia.

“China is clearly showing signs of bottoming and recent corporate results have underscored the strength of some business franchises. Ultimately, we continue to have conviction in our holdings and their ability to navigate the various crosswinds buffeting markets.”

Kristy Fong

Kristy Fong is investment director of the £445 million Abrdn New India Investment Trust that looks to “achieve long-term capital appreciation by investing in companies which are incorporated in India or which derive significant revenue or profit from India, with dividend yield from the company being of secondary importance.”

Fong wrote: “India is the world’s fastest-growing major economy, backed by a resilient macro backdrop which includes a real estate boom, strong consumer sentiment in urban areas and a robust infrastructure capex cycle.

“The growth story is underpinned largely by supportive policies from the central government as well as a decade of painful but necessary economic reforms. The groundwork laid by these sweeping reforms have put India on a positive economic trajectory.

“We are seeing early signs of a private capex revival. This can potentially continue to sustain both economic momentum and corporate earnings growth.

“Still, India faces some near-term risks, most of which are external. These include potentially higher global energy prices and a slowdown in the world economy.

“Valuation is also a perpetual risk — it is looking stretched in some parts of the market, especially in small- and mid-caps. The key to taking advantage of this market’s promise is bottom-up stock picking that is backed by fundamental research, which aligns well with how we invest.

“We expect our core quality holdings to continue to deliver resilient compounding earnings growth over the medium term, come what may in terms of macro conditions.

“The portfolio’s consistency of earnings growth remains healthy and the fundamentals of our holdings, including pricing power, strong balance sheets and the ability to sustain margins, remain solid. We maintain confidence in the experienced management teams of these companies.”