Going back to basics as politics takes centre stage
- In a year of politics-driven markets, the investment focus remains on prudently managed, quality companies.
- Healthcare will be a US election talking point, but the outlook is positive and companies in the sector represent good value.
- 'Black swan' events add an air of unpredictability to markets in 2020, with clouds hovering over an improving global economy.
The relationship between political developments and stock market performance can be a surprisingly tenuous one. But there’s no getting away from the political shadows that currently loom over both the US and the wider global economy.
While political uncertainty has been a theme of recent years, the early weeks of 2020 offered a reminder that events can develop very quickly. No one was talking about Coronavirus at the turn of the year, but it became a talking point very quickly, referred to as a ‘black swan’ event, arriving without warning and with far-reaching consequences.
This unfolded against the backdrop of an improving global economy. A modest recovery partly reflects Central Bank policies, but it’s also more broad-based this time, including in Europe. China was stabilising before Coronavirus, and inflation is still very benign.
In the US the attention moved quickly onto the elections once President Trump’s impeachment hearings ended in his acquittal. One sector usually worth watching in an election year is healthcare, as it’s mostly non-partisan, the pricing backdrop is fairly opaque and companies know what price lines not to cross. The healthcare environment in general is better than the headline rhetoric suggests. While there are some price controls and margin constraints, they are offset by the trend of demographically-driven demand.
There is value in healthcare and here at the North American Income Trust, we own a fairly diversified group of holdings in the sector, including a medical device company, pharmaceuticals and a health insurer.
Nothing is guaranteed in election year, but we do know that the political card will be played as it is every four years. In US domestic policy terms that may well mean payroll tax cuts in the middle of the year for middle income earners, and perhaps an increase in earned income tax credits to target lower income taxpayers.
The ongoing US-China trade negotiations remain unpredictable, with the bigger structural issues yet to be resolved despite some areas of agreement. Many of the tariffs already imposed are not planned to be rolled back, leaving a lot of tariff dollars on the negotiating table that can be used as leverage in the next phase. Intellectual property and technology transfer are still key issues, and if President Trump gets better safeguards on these points he should be more disposed to further negotiate.
In a year of politics-driven markets, the focus is very much on quality. The North American Income Trust usually holds around 40 stocks, with the top 20 accounting for around 60% of the portfolio. The current portfolio concentration are a group of cash generative companies we believe to be fair values, possess good fundamentals and should have fewer perceived tail risks.We aim to protect the downside by focusing on companies that are conservatively managed with an emphasis on understanding the risks inherent in their industry, as well as prioritizing the need to continually invest back into the business. These characteristics are exemplified by some of the biggest holdings in the portfolio, such as Coca Cola, CitiGroup, Lockheed Martin and Philip Morris.
Another holding is Gaming and Leisure Properties, a real estate investment trust that specialises in local casino properties and which provides a dividend of 6%.
In the banking sector we have become more focused and have continued to build a position in Citigroup, which has streamlined its operations by focusing on areas where they have a competitive advantage, divesting lower return segments and broadly reducing the risk profile of the company as a whole.
Overall, it’s about going back to basics and believing in the building block-type stocks that we know well.
Risk factors you should consider prior to investing:
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Other important information:
Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.
Investors should review the relevant Key Information Document (KID) prior to making an investment decision. These can be obtained free of charge from www.northamericanincome.co.uk or by writing to SL Capital Partners LLP, 1 George Street, Edinburgh, Scotland, United Kingdom, EH2 2LL.