A Value View: The Merchant’s Trust PLC

 

 
Transcript: Hello, and welcome to A Value View from The Merchants Trust. In each edition Simon Gurgle, Fund Manager at The Merchants Trust, offers his thoughts on developments affecting the UK market and what it means for investors.
 
Jon Cronin: It’s great to see you again; The Merchant’s Trust has been around for Over 130 years, I believe. What do you make of that Simon?

Simon Gurgle: Hi Jon, it’s great to speak to you again. The Merchants Trust has been around 133 years, as you say. And, yeah, it’s great to be here to talk about that. With all humility, what we’re trying to do at Merchants is take a long-term view: see ourselves and investors and shareholders through difficult times and good times, and to deliver outcomes that shareholders want in terms of good performance and a rising dividend, which we’ve managed to do for the last 40 years.

JC: Of course, over that time there have been good times, but also some tough times; some choppy waters as well for The Merchants Trust.

SG: Yes, absolutely. I mean, we’ve had all sorts of environments, certainly over 133 year. We’ve had world wars and financial crises, periods of very high inflation, periods of recession. And so it’s important throughout to have a long term focus of what you’re trying to do: a long term strategy, independent board of directors who are taking the view to plan for shareholders and work out how to set up the company with the best interests of shareholders in mind. So, yeah, there’s been a huge amount going on over that period, but equally I think we’ve come through it very well. In the last 40 years we’ve managed to grow the dividend every year and we’ve delivered very strong returns in the last few years as well. So, we are pleased with where we’ve come out, but we continue to see choppy times and difficult conditions.

JC: Any reflection, Simon, on 2022 so far?

SG: Well, yet again, things look very different to how we thought they would be at the start of the year. It’s not just the Brexit referendum this time around or the COVID pandemic, it’s unfortunately the situation in Ukraine, which has come as a bit of a shock to the system. We’ve had a massive spike in commodity prices, particularly energy, but also food. That’s raised the cost-of-living question for many consumers. So it’s been difficult economically. Within the stock market you’ve seen a reflection of that, a big polarisation. The commodity areas, energy, mining: those sectors have been very strong. And some of the more defensive areas like utilities and pharmaceuticals, which are more reliable, they’ve also been good performers. And areas that are more cyclical – take retailing, house building, construction – those areas have generally been sold off by investors. They’ve underperformed because investors are worried about what might happen. And therefore, you’re seeing again quite a wide spread of returns, quite a volatile environment.

JC: And looking ahead, Simon, over the next few months into 2023 as well. Where do you stand on that? How do you see things panning out, as much as we dare to try and take a look at the crystal ball and imagine what’s going to happen next? What’s your outlook?

SG: It’s difficult to be too precise about the economic outlook. There are some positive factors, such as the fact, well firstly we started this year from quite a depressed base, a number of activities, like travel and leisure, were very depressed last year during a pandemic. And so there’s a natural level of recovery in the market. Employment’s very high in the UK. Wage growth is strong. Interest rates,although they’re going up, are very low. So there are a number of positive factors, and most companies we speak to in general are performing quite well, even if conditions might be starting to slow down. On the other hand, we’ve got a big shock in terms of rising costs, supply chain problems, the COVID pandemic is still affecting supply coming out of China in particular. And so there are headwinds out there as well. That’s creating volatility in the stock market and as an investor, that always creates opportunities. So right now the biggest opportunities arguably are in some of the more cyclical businesses, where they’re pricing in potentially quite a sharp downturn, and that may or may not happen. Even if it does happen, many of those companies look pretty solid value on a two-to-three-year view. And of course, if conditions turn out to be slightly better than that, those investments could prove to be very cheap and very attractive at the moment.

JC: Well, it’s certainly going to be an interesting few months ahead, especially politically in the UK with a change in prime minister how will that impact things from your perspective, Simon?

SG: The good news about this, I think, is if you compare it to the last time we had political instability, when Theresa May was under huge pressure in 2019, I think at that point there were two massive risks for investors. One was what would happen with Brexit. We had no idea really how the government would deliver Brexit. And the second one was, if the conservatives were to lose power, you had Jeremy Corbin as the leader of the opposition and a very different political agenda. I think now the policies are probably not going to be very different to where they have been. Brexit has happened. I mean, there’s still technicalities to sort out, but in big picture terms, Brexit has happened. And the gap in policies between Conservative and Labour is actually pretty modest. If anything, the Conservatives have adopted many of Labour’s policies in the last year or two. So I think there’s not so much to worry about from an investor point of view as to a potential change in leadership or even potentially change in government.

JC: Okay. Well, look, Simon, I’m afraid we’re out of time, but thank you very much indeed.

nd thank you for listening to A Value View from The Merchants Trust, where we bring you topical news affecting UK equity markets. You can find out more about The Merchants Trust by going to merchantstrust.co.uk. Thanks again for listening and from all of us at The Merchants Trust, stay safe and stay well.
 
Find out more about The Merchants Trust here > 
 

 

Side notes: Cyclical opportunity?

Side notes: Outlook for the rest of the year and into 2023

 
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