27 September 2023
With inflation cooling and interest rates beginning to reach their highest point, some sectors could be in line for a significant boost, according to wealth manager RBC Brewin Dolphin.
While there are no guarantees of what will happen in the future, at its most recent vote the Bank of England’s Monetary Policy Committee decided to keep the base interest rate at 5.25%, after 14 rises in a row. The Governor of the Bank of England also recently indicated that interest rates could be reaching their peak.
Against a high interest rate backdrop, so-called ‘growth’ companies – stocks that can outperform the market because of their future potential – have fallen out of favour in a big way. Companies in the technology sector have been hit particularly hard, as their valuations have been based on future earnings and they currently rely on debt to finance themselves.
However, some more traditional areas of the market have suffered too, as their prospects are closely linked to the direction of interest rates. With an end in sight, Rob Burgeman senior investment manager at RBC Brewin Dolphin said some of them could be in line for a turnaround in fortunes.
Rob Burgeman said: “The latest rise to interest rates suggests we could go a little higher, but we’re getting a bit closer to the crest of the wave. Inflation is a lagging indicator – it looks backwards, rather than forwards – and is difficult to control with only interest rates, so the Bank of England will be reluctant to bring the base interest rate down too quickly.
“Markets don’t deal with today – they are more of a reflection of where we will likely be tomorrow. The share prices of property and infrastructure companies and trusts, for example, are currently going through a tough time because interest rates look likely to stay higher for longer. An investor buying into them will only do so for a yield that is over and above the risk-free return available on cash – up to around 5%.
“However, it seems likely that in two years’ time rates will be lower than they currently are. The companies that benefit from this reversal of interest rates are probably going to be some of the same ones which struggled as rates rose. As we have seen, though, some may not make it through this period of volatility, so we would strongly recommend seeking professional advice before making any significant investment decisions.”
Commercial property
Commercial property has particularly struggled in the face of not only rising interest rates, but the aftermath of the Covid-19 pandemic. Many people are still working from home, which has made many question the future of offices, while retail and leisure have suffered as shoppers prioritise rising mortgage costs. Data from the Association of Investment Companies (AIC) showed investment trusts in the UK commercial property sector had an average discount to net asset value of -26.7%.
Rob said: “Property has an innate gearing factor when it comes to interest rates – the value of property is a function of the risk and volatility of the rent coming in. You generally find that industrial property is highest yielding – manufacturers and other industrial occupiers tend to be economically sensitive – followed by distribution and then secondary offices.
“There are some perfectly good companies in the property sector which have been unfairly lumped together with their peers. For one, Primary Health Properties (PHP) is an investment trust that invests in healthcare facilities, such as GP surgeries. Two years ago it yielded around 4%, but now it yields nearly 7%.”
Housebuilders
With the average two-year fixed rate on a 95% mortgage nearly 7%1, many people are deciding to stay put rather than buy a new home. That is obviously bad news for the housebuilding sector – some of the UK’s top names have reported slowing sales and house prices have fallen for the fourth month running2.
Rob said: “The last time we went through a period like this in 2008 and 2009, housebuilders were on the edge of collapse. But, this time round, they are in a much better position, with much stronger balance sheets. There are undoubtedly challenges ahead and they may well build fewer homes, but this is not the existential crisis that befell them 15 years ago.
“Persimmon has long been seen as the blue-chip choice in the sector – it has cut its dividend hard on the back of slowing sales, but still yields more than 5% and trades on a relatively attractive forecast price-to-earnings ration of just 13.8 times. Berkeley Group is another quality name, but is more focussed on mixed-use developments. It has never been a great yielder, but still offers over 2% and trades on a forecast price-to-earnings of 12 times.”
Retail
As consumer confidence has weakened and people have less disposable income, retailers have seen their share prices fall. Consultancy GfK said that UK consumer confidence plummeted in July as the rising cost of living continued to bite3, while there have been notable retailers hitting financial troubles – most recently the discount retailer Wilko.
Rob said: “Retail – excluding supermarkets – has been a tough place to be for a while. Not only did they have the Covid-19 enforced lockdowns between 2020 and 2022, but they have emerged into a cost-of-living crisis that has seen many people prioritise the necessities of life and, where they can afford to do so, holidays abroad to make up for the experiences lost during the pandemic.
“That said, there have been some bright spots in the sector defying the gloom. Next continues to buck the trend, and has even scooped up some of the retail brands that have gone to the wall over the course of the last few years, such as Made.com. Marks & Spencer is also beginning to reap the rewards of its restructuring programme and shift towards more online trade. Those who remain will pick up the trade left behind – particularly if interest rates come down and people can afford to loosen their purse strings.”
– ENDS –
Rob Burgeman and his fellow investment managers at RBC Brewin Dolphin put together bespoke investment portfolios for clients based on their long-term objectives and their attitude to risk. The portfolios will have a mixture of hand-picked holdings in them including third party funds and individual stocks that are researched and recommended by RBC Brewin Dolphin’s in-house research team.
Disclaimers
The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444).
PRESS INFORMATION
For further information, please contact:
Peter McFarlane peter.mcfarlane@framecreates.co.uk / Tel: 07412 739 093
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £53.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They 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 part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th April 2023.
1 Source: https://www.rightmove.co.uk/news/articles/property-news/current-uk-mortgage-rates/
2 Source: https://www.ft.com/content/631d1a3a-71fb-4586-9728-d41db2cd16d9
3 Source: https://www.ft.com/content/8a07079d-f2f9-4eaa-832f-acff30b600d4