This article is part of Morningstar’s Guide to Income Investing. Whether you are looking grow your pension pot, or invest for retirement income, this week we have all the news, information and education you need.
Emma Wall: Hello and welcome to the Morningstar Series "Why Should I Invest with You?" I'm Emma Wall and I'm joined today by Simon Gergel, Manager of The Merchants Trust.
Hi, Simon.
Simon Gergel: Hello.
Wall: So U.K. equities, U.K. equity income no less the most sort out sector of all of them as far as investors are concerned, the interest rates have been so low. Let's start with interest rates, because there is much murmuring that we are going to have an interest rate rise at the end of this year or at the beginning of next year. Do you see that as an opportunity or perhaps a headwind for U.K. equity income?
Gergel: Well, I think you are right we are at that stage where we are getting close to that point. I don’t necessarily see it as a headwind or an opportunity in itself. But I think it is indicative of our economy that is gradually recovering.
So hopefully we do get an interest rate because that means that economy has continued to grow, create jobs and potentially lead to inflation gradually starting to pick up. So I think we are quite well positioned for an interest rate rise. We've been thinking about that for a long time about what it might do to stocks and valuations and so we are not worried about that. I'd be more concerned if you don’t get an interest rate rise.
Wall: Looking then at the portfolio, it had a really good run this year up until about May and then it's been, there's been less of a rally since then, there's been some decline what has caused that, that shift.
Gergel: I think there have been a number of factors. The one that most people cite is the slowdown in growth in China and the commodity markets have been weak, but that’s been going on for a while. Commodity markets have been weakening for two or three years.
Chinese growth has been slowing and China has been trying to reorganise its economy away from investment towards consumption. But for some reason the markets got worried about them, the market started to get worried about U.S. interest rates going up. I don’t think there is any fundamental problem as far as we look at it. I mean we look at U.S. economy recovering, the U.K. economy recovering, Europe starting to turnaround. We are not talking about strong growth, but we see a reasonable economic outlook and so we see this sort of in the market as an opportunity rather than a problem.
Wall: And also your trust is one that does offer income and along the way there may be some capital volatility, because your priority is not growth it is income and so perhaps that has a slightly different shape in the line growth.
Gergel: Well, we try to deliver both income and total return, capital return. But you are right we have a strong focus on companies that can deliver a high yield to start with and income is a big part of the total return that investors get over time.
Wall: And where are you seeing those great income opportunities then.
Gergel: Probably in two different areas. So one area, are the very large companies the mega caps, companies like GlaxoSmithKline, Royal Dutch Shell, HSBC. They are offering really high yields today and we think those yields are sustainable and we believe those companies are cheap. So that’s one area. And almost to the other extreme some of the recovery situations where current trading is difficult under pressure, but whether it is good long term value and so we see whole range of companies U.K. some of the U.K. construction companies, recruitment company, industrial property, lots of different areas where the longer term potential isn't reflected in the share price.
Wall: You said long term there twice.
Gergel: Sorry.
Wall: No, no its good it's a good indicator of how you are looking at these investments because the U.K. stock market has had a fantastic rally since the credit crisis, but then it is the nature of market cycles that perhaps now we are in for bit more of a bumpy ride and so taking long term view is key.
Gergel: Yeah, I mean if you look at the FTSE 100 index. It's below where it was at the turn of the century, so 15 years. It did briefly couple of months ago, briefly got above the all-time high. It's got nowhere for 15 years, admittedly it was expensive in 2000, but it's not expensive now. It's quite cheap in fact as of today the market looks really quite good value particularly some of those big stocks.
Wall: So opportunities.
Gergel: Yeah, absolutely.
Wall: Simon, thank you very much.
Gergel: Pleasure.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
