What Will Drive UK Stock Market Returns in 2018?

BlackRock's Adam Avigdori looks ahead to 2018 to what will drive stock market growth and investment opportunities over the next 12 months

Emma Wall 4 December, 2017 | 10:42AM
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Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and I am joined today by Adam Avigdori, Manager of the BlackRock Income and Growth Trust to give his three theme picks.

Hi, Adam.

Adam Avigdori: Hi, Emma.

Wall: So, what's the first theme that you'd like to highlight today?

Avigdori: CapEx spend.

Wall: And why do you like CapEx spend?

Avigdori: Well, I think one of the privileges of BlackRock is we get to see lots of companies and of course – most years we see thousands of companies come through. In the U.K. alone we see well over 800. And I guess one of the biggest themes that we've taken away from those meetings has been the propensity to spend CapEx for the first time in probably five or six years. We've seen that in the surveys, we've seen it in our meetings and we are starting to see it come through in the underlying order books.

So, CapEx is I think a tailwind for markets. It's just started.

We are in a world that is growing for the first time – synchronized global growth for the first time since 2011. So, underlying CapEx trends remain strong and what we are trying to do in the fund and the trust is to try and take advantage of that in a number of areas – U.S. shale, underlying manufacturing efficiencies and manufacturing automation, and also heat treatments as well, which in the steel industry and in other sort of heavy industries is, obviously, a very strong tailwind there. So, those are sort of three areas in CapEx that we are looking to play in the fund.

Wall: What about the second theme?

Avigdori: So, the second theme is consumer staples and dividend growth. I guess one of the distinctions this year has been clearly the conversation round bond proxies, and I think we – lots of sectors have been caught up in that. And one of the sectors we think has probably been slightly unfairly caught up in it has been the staple sector. And what we see in the staple sector actually is dividend growth.

I think that's the biggest distinction between a utility company or fixed bond, the fixed coupon and a stable company. And I think as we go through the next four or five years, the ability for you and a business and a corporate to grow their coupon is going to be really, really important. Because I think we all recognize that the credit market is probably going to change.

So, we think the stable company have great dynamics. We are, obviously, seeing a massive pick up in the emerging markets for the first time in a number of years and we are starting to see some of that growth come through. So, we are really trying to take advantage of the emerging market consumer, which will also pay us very strong dividend growth.

Wall: And the third pick is rather a contrarian one, isn't it? It's not one that everyone is in agreement with, and that's domestic.

Avigdori: Yeah, that's right. And what we found this year is the sort of 20%-25% of the U.K. stock market that is focused on the domestic U.K. economy has really struggled. And it struggled for a number of reasons. The vast majority we know, you know, politics and Brexit, and just a clear uncertainty from the consumer about their employment prospects, about their house price. And that has, obviously, led to probably a slight slowing in consumer spends, probably a slight – certainly a slight slowing in U.K. GDP as well.

And I think in that backdrop, it's broadly been right to not own many of these companies. But I do think we are now starting to see some valuation support. Now, clearly, there are both structural and cyclical issues, we've still got Amazon disrupting the high street, we've got sterling creating big inflation issues, sterling fall that is creating big inflation problems.

So, you know, there are clear underlying issues in a number of places, but we think that it is time just to start thinking and to reviewing, and to understand the valuations that these businesses are discounting and the circumstances they are discounting. And we do think over the course of next three or four years, we are going to be in a position to pick up some real value.

Wall: Adam, thank you very much.

Avigdori: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BlackRock Income and Growth Ord186.20 GBX-4.02Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar