Boomerang businesses and the rise of Asian consumers

News & comments

6 January 2021

The last 12 months may have been among the most volatile and challenging of recent years, but there are grounds for optimism in 2021, according to Brewin Dolphin.

Predicting a more sustained recovery next year, the wealth manager said the development of successful vaccines, along with the continued rise in technology and innovation, record level of consumer savings, and a more collaborative US president, should provide a base for significant improvement in the UK and global economies.

Against this backdrop, John Moore, senior investment manager at Brewin Dolphin highlights five significant trends for UK-based investors to consider in the year ahead.

1. Continued UK M&A

The second half of 2020 has seen a significant rise in merger and acquisition (M&A) activity involving UK companies. Some of the names involved in deals and bids include RSA Group, the insurer; developer Urban & Civic; TalkTalk, the telecoms company; oil and gas operator Premier Oil; retirement home developer McCarthy & Stone; and William Hill, the gambling group, among a host of others.

Brewin Dolphin said this trend will likely continue into 2021, potentially spreading to new types of businesses and opportunities.

John Moore said: “We’ve seen some what might be described as ‘mid ranking or unremarkable’ companies on the end of takeovers and approaches from would-be suitors over the last few months. Some of them have had their troubles and a new owner is willing to come in, take a bit of risk, and make it work at a time when it is cheap to borrow money and valuations are not where they were 12 months ago.

“What we could see in 2021 is this trend moving to either side of the middle ground – towards companies that are weaker and stronger. Companies like First Group, the transport operator, fall into the former category given the impact of Covid-19 on its business and the complexity that has hung over it for years now. There is action that a new owner with the right plan could take.

“Crest Nicholson, the housebuilder, is another possibility, particularly given its history of ownership and private equity’s tendency to return to familiar assets. Sage, the software as a service business, could be another that is in a tricky strategic place and could attract opportunistic buyers.

“On the other side, Admiral is a high-quality insurance business with an underwriting record and prudent expansion approach that has made it a force to be reckoned with, so much so that larger scale rivals may be tempted to consider its merits.”

2. Big moves at major UK companies

Despite the partial recovery in the UK stock market, some well-known companies’ valuations are still languishing far below where they started the year. Many of them are businesses with recognised brands or positions but have something to prove to long-suffering shareholders. With this in mind, more radical action may be required if they are to remain relevant – 2021 is the year they need to show vision and delivery.

John Moore said: “There are parallels between what happened following the recession of the early 1990s and where we are today. Then, the trading circumstances of companies such as ICI, Dalgety, P&O, Hanson, and BTR changed significantly, and some of their subsidiaries were not performing to their full potential within the wider groups. As a result, these businesses took big steps in restructuring their operations – we could see some of the UK’s biggest brands do the same again.

“GlaxoSmithKline has been linked with a split in its consumer and healthcare businesses ever since Emma Walmsley took the top job in 2017. Unlike UK-listed healthcare rival AstraZeneca, GlaxoSmithKline has had a poor Covid-19 period – this has placed more emphasis on its strategic and capital expenditure plans going forward.

“Aviva is a savings, retirement, and insurance business and whilst progress has been made simplifying the geographic reach of the group, the end markets it serves are likely to respond well to greater scale or specialisation than is presently the case.

“Earlier in the year there were vague rumours of interest in BT and the weakness in its share price could make it an attractive target for other takeover or break-up approaches. Openreach and EE are among the best-performing BT businesses, but they have been overshadowed by issues in its Global Services division and the cost of infrastructure development and modernisation. Still, there is significant value that could be unleashed by giving these businesses the opportunity to flourish, whether within a restructured BT or as stand-alone entities.

“Similarly, there are two very distinct businesses within the ITV group, with growth potential and different priorities. If its share price continues down its current route, splitting the two may not be out of the question – this could free up investment in the ITV Studios business, which has produced some real success stories in recent years, and focus corporate activity in the Broadcast and Online operation.”

3. Boomerangs and zombies

2020 was a year few will forget, and it had an impact on many parts of the business community, not to mention the wider public. Changes to the way that we consume, consider leisure, and work will likely endure and become permanent; but other setbacks that businesses suffered could be temporary and they will recover from them. The former may create ‘zombie’ companies and the latter boomerangs.

John Moore said: “There are some companies in tricky positions that could struggle without taking significant self-help measures. The way that we use and consume traditional sources of energy feels like it has changed – as part of this, it was noticeable that electric and hybrid car purchases moved above 5% of overall sales, a level that should mean greater acceptance and adoption. Added to this, government policy stopping fossil fuel car sales from 2030 will only enhance the trend. Royal Dutch Shell spent a lot of time and effort getting into downstream and upstream oil and gas – as the world changes, it’s going to have to do the same again to exit these markets or it may find itself much less relevant.

“By contrast, there are businesses primed to bounce back when confidence returns. Compass, the food service company, is a fundamentally good business in a market that should make a strong return when we get back to some sort of normality. In a similar vein, drinks group Diageo has been resilient through the crisis; yet, its premium sales are made in hotels, duty free shops, and at events – a market that has all but disappeared in lockdown. When these points of sale return, it will be great news for the business.”

4. Rise of the Asian consumer

For years Asia – particularly China – has relied on consumption from other parts of the world to drive its impressive economic growth, with the intention to eventually balance that more evenly with internal demand.

Next year could be the year this dial shifts, according to Brewin Dolphin, with consumers in Asia becoming more important than ever to the world economy. John Moore said: “2021 will be a crossroads moment for the global economy, where Asia – especially China – looks more to its own population as a market for the goods produced in the continent.

“There are some names many are familiar with that have good exposure to Asia: LVMH, the company behind Louis Vuitton, Moet and Hennessey among a host of luxury brands; Apple, the electronics group; and IHG, the holding company of hotel brands like Holiday Inn. But, despite China’s rise, its market – and Asia more generally – is still under-represented in many portfolios.

“One of the best ways of getting exposure to Asian companies – particularly at a grassroots level – is trough collective vehicles: they will invest in some of the names that you might be familiar with, such as Alibaba, but also ones you will likely have no knowledge of. Allianz China, Fidelity Asian Values, and Baillie Gifford China Growth Trust are all good starting points.”

5. Income still tough to find

2020 has been a particularly tough year for income investors, with many companies cutting dividends or scrapping them altogether. From an income perspective, the year was perhaps encapsulated in Royal Dutch Shell’s decision to cut its dividend for the first time since World War Two – albeit, the oil and gas major upped its payments again later in 2020.

Could 2021 offer a much-needed boost for people who rely on their investment as a source of income? John Moore said: “Income is economically sensitive, which investors need to be mindful of. Dividends, therefore, look unlikely to bounce back to 2019 levels for a few reasons.

“Companies are likely to want more flexibility in their balance sheets to contend with the variety of options that could lie ahead – a sustained economic downturn, further bumps in the road, acquisition opportunities, or other investment decisions. With that, the key for investors will be to look ahead, rather than to the past for where sources of income may lie.

“Among the options is Finsbury Growth & Income Trust, managed by Nick Train. It is a reasonably defensive play, albeit with a comparatively low level of income. The trust has performed well in a UK context, but hasn’t in comparison to the MSCI High Income index – partially because of the UK’s overall performance relative to other markets.

“Yields of 4% are likely to be the outer edge. If you’re looking for trusts, aim for those with flexibility to navigate the short-term and where the investment approach has reflected some of the changes and challenges that the last nine months have brought up. Troy Income & Growth Trust and Murray Income Trust, which have more of a tilt towards growth in their portfolios – are among the trusts well placed to navigate what lies ahead.

“An investment manager, like Brewin Dolphin, will set up a portfolio of assets that will capture these economic trends and deliver growth and income – while managing risk – based on your objectives. Always remember to take advice before making any significant financial or investment decisions.”

ENDS-

PRESS INFORMATION

For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / Tel. +44 (0) 7412 739 093
Richard Janes richard.janes@brewin.co.uk / Tel. +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: (0) 20 3201 3026
Anita Turland: anita.turland@brewin.co.uk / Tel: (0) 20 3201 4263
Payal Nair payal.nair@brewin.co.uk  / Tel: +44 (0) 20 3201 3342

NOTES TO EDITORS

Disclaimers:

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About Brewin Dolphin

Brewin Dolphin is a UK FTSE 250 provider of discretionary wealth management. With £47.6bn billion in total funds, it offers award-winning personalised wealth management services that meet the varied needs of our clients including individuals, charities and corporates.

We give clients security and wellbeing by helping them to protect and grow their wealth, in order to enrich their lives by achieving their goals and aspirations. Our services range from bespoke, discretionary investment management to retirement planning and tax-efficient investing. Our focus on discretionary investment management has led to significant growth in client funds and we now manage £41.2* billion on a discretionary basis.

Our intermediary business manages £14.5* billion of assets for over 1,700 advice firms either on a discretionary basis or via our Managed Portfolio Service.

In line with the premium we place on personal relationships, we’ve built a network of 33 offices across the UK, Jersey and Dublin, staffed by qualified investment managers and financial planners. We are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.

*as at 30th September 2020