Can the consumer rescue 2020 income prospects?

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With more than double a weighting to the consumer goods sector compared to the FTSE World index, manager of the BNY Mellon global income strategy, Newton’s¹ Nick Clay says he remains confident in select areas for 2020 despite his caution on the global economy as a whole.

Consumer sectors are an area of ongoing opportunity for Newton global equity income manager, Nick Clay but not the “high street”² end of this market segment. Almost a quarter of Clay’s BNY Mellon global income strategy is exposed to consumer goods, versus an 11.2% position in the FTSE World index; consumer services makes up a further 10% of the strategy, although this is a slight underweight position relative to the index (11.1%).

Holding the likes of H&M and Inditex in the consumer goods sector, Clay says he is attracted to the scale advantage, low cost operator and ability of such companies to adapt to the new playing field of retail. Not all companies can. For example, a study released at the beginning of January noted there are now around 50,000 fewer shops on UK high streets than just over a decade ago and some analysts predict it will only get worse.³

Clay comments: “The high street has been hit by the perfect storm – the rise of online shopping, increased rents and business rates have taken their toll. Long running staples of the British high street including big-name brands Coast, Karen Millen and Debenhams are all falling foul of our ever-increasing desire to shun physical shopping in favour of online. Against a bleak backdrop of strong economic headwinds from Brexit and a global slowdown, not to mention the popularity of e-commerce giants does the high street really have any chance of revival or is it already dead and decimated?

Clay notes it is a widely accepted view the rise of e-commerce giants like Amazon have signalled the death knell for the high street, not just in the UK but worldwide. “Creating competition today is also incredibly easy. It does not involve a lot of upfront investment, there’s no need for a physical store, and cheap money is readily available around the world after 10 years of QE. This means that if a business is not a scale player in its industry, not the lowest cost producer of a product and does not have the strength of a balance sheet behind it, it will face a very uncertain future.

With advancements in technology and consumers becoming more aware of how and where products are made, it is incredibly important for the high street to adapt in line with modern consumer trends and spending behaviours, he notes. “The businesses with the most staying power will be those that can create innovative and memorable shopping journeys for customers, one which we believe we encompass a hybrid on-line/brick and mortar approach. The companies that grasp this and successfully deliver experiential and relevant shopping experiences will come to define the high street of the future.” 

Income & technology

Even with his strict yield discipline, for Clay the technology sector is another area of opportunity, with some 19% of the strategy allocated to this part of the market. While in the final quarter of 2019 the tech sector dragged on performance, Clay remains upbeat about its prospects for 2020, even as he remains cautious on the outlook for economies and financial markets over the medium term.

Cisco Systems and Infosys were key detractors in the final quarter of the year. Although Cisco’s quarterly results met expectations, revenue guidance for the next quarter disappointed and the shares fell as a result. We believe this short term weakness in guidance is due to delays in orders rather than cancellations and thus we except things to improve in 2020. Infosys declined after the Indian outsourcing group reported it was investigating allegations of accounting irregularities, which had been raised by whistle-blowers. We have examined its accounting practices and, based on what we have seen so far, we believe they are in line with industry standards. However, an investigation is ongoing.” Clay notes another drag from technology came from what the strategy didn’t own, namely, Apple. Clay cannot hold the outperforming tech company as it does not meet his yield threshold. 

Geographic breakdown

North America continues to be the largest region in the global equity income strategy, at just over 45% of the portfolio. However, this is actually an underweight of the area as it constitutes c58% of the FTSE World index. On the other hand Clay is overweight with respect to his second largest regional weighting, Europe ex UK. At 30% exposure it represents twice that of FTSE World index’s 15% allocation to the region.

Over the course of the past calendar year, the global income strategy has seen a slight shift down in its UK and Netherlands exposures, while Switzerland has moved up to more than 12% of the portfolio. Exposure to Sweden has more than doubled over the course of the past 12 months, albeit from a very low base, rising from under 2% of the portfolio at the end of 2018 to around 4.5% by the end of 2019; the FTSE World index has Sweden at a weighting of just 0.87%.

Calendar year performance of global income strategy
2015
2016
2017
2018
2019
Newton Global Income
17.15
12.49
4.74
-0.40
29.34
FTSE World TR
9.86
11.89
8.99
-4.16
30.10

Source: Newton, ending 31 December 2019. The strategy adheres to the same investment approach as BNY Mellon Equity Income Fund. Performance calculated as total return, income reinvested, gross of fees, in EUR. Fees and charges apply and can have a material effect on the performance of your investment. Newton claims compliance with the Global Investment Performance Standards (GIPS). A GIPS compliant presentation is available upon request via your BNY Mellon Investment Management EMEA contact.

What’s ahead for 2020?

Clay says: “Looking at the stock market, leadership has been exceptionally narrow in 2019.” He believes that as such, some stocks, which might ostensibly appear relatively safe and defensive, are less attractive than they were given extended valuations and heightened expectations. Last year saw the second largest re-rating of world markets since 1988, he notes, adding that as such, expectations are very high for the year ahead. “Companies will need to deliver on their numbers in 2020 against a backdrop where margins and tax along with sales growth are all coming under pressure.” 

¹Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

²BBC.co.uk How to save the UK’s crisis-hit High Streets. 13 January 2020.

³Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

Past performance is not a guide to future performance. 

The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.

Objective/Performance Risk: There is no guarantee that the strategy will achieve its objectives.
Currency Risk: This strategy invests in international markets which means it is exposed to changes in currency rates which could affect the value of the strategy.

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