Ben Lofthouse, Fund Manager of Henderson International Income Trust, shares his view of overseas income markets and the momentum behind global dividends growth.
It’s been a fascinating year so far with a lot of the trends around economic growth continuing, which has led to some changes in the global macroeconomic landscape.
There have been some notable surprises, too. One of those was the US corporate tax cut, which has made life a lot more profitable for US companies with domestic earnings, which I think has received less attention than the repatriation element of the legislation for overseas dollars. Whichever way you look at it, we are seeing strong earnings growth in the US partly as a result of these tax reductions.
The other big surprise is the extent to which politics has acted as a destabilising force on markets. Against a backdrop of relatively good economic growth, we have had two or three significant events. Firstly, the President of the United States has been much more forceful than many of us expected on trade, and this has caused not a direct impact so far but has certainly caused regions like China, Asia and Europe, to some extent, to underperform because they are quite reliant on trade.
Another thing we’ve seen is an Italian election which resulted in two parties taking power that weren’t expected and some of their communication has led to significant uncertainty once more around Europe. Although the European economy has been OK we’ve seen destabilisation in European stock markets, particularly in financials. The underlying economic data has been quite good but sentiment-wise and in terms of political news it’s become a tough environment to sit with.
Performance, politics and profits
At Henderson International Income Trust (HINT) we haven’t made any particularly large changes to the portfolio this year. The US is the biggest exposure that we have at about 31% of the portfolio, so we have been pleasantly surprised by the tax cuts, which have been beneficial to the companies we own and we have seen good earnings growth coming from there. Earlier in the year we reduced some of our exposure to companies that had performed well in recent years, in particular Asian growth companies where we were able to realise some very attractive profits.
These changes have derived from valuation changes rather than macroeconomic concerns and in the same vein we have added European stocks to the portfolio during the past four or five months. Amid the sell-off of European stocks we have found that they do exhibit very good value – particularly global stocks that are domiciled or listed in Europe but derive a significant proportion of their earnings from overseas. We see those trading at quite a big discount to their peers elsewhere.
At the moment we are not using the gearing facility. We have been very active with gearing in the past and generally we use gearing in a countercyclical manner. That means we’ve used gearing when we see markets selling off significantly during periods of volatility and valuations come down to the point that they offer very attractive opportunities.
We’ve had quite strong markets for a few years and we’ve got quite a lot of political noise as I discussed earlier. I think we’d like to keep a bit of powder dry and hold back on gearing simply to make sure we have some room to take advantage of opportunities if they arise. These opportunities may not come at the complete market level, but they could come in specific areas and sectors as a result of trade discussions, for example.
I am often asked about gearing and recently I’ve been asked about the effect of rising interest rates on the cost of borrowing money. What you find is that any changes to the income characteristics of a portfolio as a result of small interest rate changes tend to be insignificant. So, the benefit that you get from being geared in a rising market would outweigh the additional cost of gearing and in the same way if markets fall significantly, the lower cost of gearing that you might get from interest rates going down doesn’t really help you anywhere near as much as the impact of falling net asset value (NAV).
Looking ahead to the remainder of the year, what I can say is we’re meeting a lot of companies that we own, of which there are many that are reporting on their financial health at the moment, and generally the trends are good.
Janus Henderson publishes a Global Dividend Index each quarter which effectively shows the corporate health of the world’s largest companies and how willing they are to distribute their cash. On the basis of the second quarter of 2018, things are going well. We have seen headline growth of just over 12% and underlying growth of 9.5%; we are seeing it broadly spread over industries and regions; we’ve had some records for some regions, such as the US, Japan and Europe; and we’ve seen some strong growth from sectors such as mining and the financial services areas, particularly banks.
The growth is so strong that we had to increase our global dividends forecasts for the year from 6% to 7.4%, so in the absence of further geopolitical events it would seem we are set for a bumper year for dividend growth. We think the portfolio is well positioned and well diversified to capture dividends growth outside the UK, where there is good momentum and earnings growth potential across many regions.
Gearing: A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. It is used as a measure of the riskiness of an investment.
Countercyclical Investing: Picking stocks that move in the opposite direction to the overall economic cycle – rising when the economy is weakening and falling when the economy is rising.