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Liontrust: five stocks for our five biggest macro themes

Liontrust fund manager Jamie Clarke highlights the stocks populating five of its biggest macro themes going into 2019.

The Liontrust Macro-Thematic process aims to identify early stage macro-themes and profit from the resultant investment opportunities.

The team defines a macro theme as an undiscounted, structural change in the process of realisation.

These ideas form the core of the Liontrust Macro Equity Income and Macro UK Growth funds. Both funds have found the going tough over the past three years, and the firm hopes the themes will spark a turnaround in fortunes in 2019. 

Here, co-manager Jamie Clarke reveals the company's five biggest themes and the stocks being used to play them. 

 

 

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The Liontrust Macro-Thematic process aims to identify early stage macro-themes and profit from the resultant investment opportunities.

The team defines a macro theme as an undiscounted, structural change in the process of realisation.

These ideas form the core of the Liontrust Macro Equity Income and Macro UK Growth funds. Both funds have found the going tough over the past three years, and the firm hopes the themes will spark a turnaround in fortunes in 2019. 

Here, co-manager Jamie Clarke reveals the company's five biggest themes and the stocks being used to play them. 

 

 

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Please sign in or register to comment. It is free to register and only takes a minute or two.

Theme 1: Scarce resource

Stock idea: Rio Tinto

'Valuations suggest that investors are still punishing mining companies for the damaging mistakes of the commodity 'super cycle'; an episode where persistently rising commodity prices encouraged overinvestment, overproduction and the inevitable bust.

'But a decade has passed and the mining sector has experienced a notable transformation. A new generation of management has atoned for super cycle excesses with an ethos of capital austerity.

'Commodity supply has been capped by an effective moratorium on investment in new mining capacity.

'Non-core assets have been sold and the proceeds used to reduce leverage and mitigate debt service burdens. The clear upshot is that sector free cash flow yields are now deeply attractive and shareholder returns, dividends and buybacks, are rising.

'Theme leader Rio Tinto gives the clearest illustration of this change. Since the demise of the super cycle, the company has taken an axe to capex and forecasts further reductions next year. This has resulted in free cash flow growing from £2.1 billion in 2013 to £9.4 billion in 2017; and net debt falling by almost £15 billion from its 2012 peak.'

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Theme 2: Ageing population

Stock idea: Legal & General 

'It’s well understood that the UK population is ageing. Whilst recent data may suggest that pace of change has slowed, the direction of travel holds and shows no sign of reversing.

'This has serious consequences for the affordability of state and corporate pensions – a pinch which explains the responsibility thrust upon savers, as the state and businesses shrink from pension commitments.

'But such difficulties offer lucrative opportunities for UK life insurers. From Sipps and ISAs, to workplace pensions, the sector is gathering sticky, remunerative assets as it offers solutions to retirement savers. We also expect growing appetite for pension Risk transfer arrangements, as companies transact with life insurers to purge balance sheets of defined-benefit pension liabilities.

'Legal and General, the largest theme holding, is the UK market leader in pension risk transfer and offers a strong example of how this can drive sustainable earnings and dividend growth.'

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Theme 3: Rising rates 

Stock idea: Lloyds

'The shadow of the global financial crisis has loomed large. But we see gathering evidence that the period of post-crisis repair is ending.

'Buoyant jobs markets provide the best illustration of this, with labour shortages offering the prospect of rising wages and inflation expectations. This all points to higher bond yields and central bank rates, in defiance of the deflationary world view that has defined the last decade.

'But memories of the crisis persist and the valuation of rate-sensitive banks and other financials are yet to reflect this shift and the associated uplift to margins, earnings and dividends. It remains our view that the reality of durably higher rates will force markets to price this significant and unappreciated opportunity.

'Lloyds Banking Group offers a great example of this. Higher rates allow Lloyds to reprice loans faster than customer deposits and grow its Net Interest Margin (NIM), or the difference between the two.' 

 

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Theme 4: Global pharma

Stock idea: GlaxoSmithKline

Our premise is that select pharmaceuticals are attractive because their valuations do not yet reflect their strategic importance to global health.

From high profile outbreaks of Ebola, to cases of zoonotic influenza (swine, avian, etc.), it’s clear that the threat of a disease pandemic is high in our interconnected, globalised world. The pharmaceutical industry has a critical role to play in minimising the impact of such diseases.

Pharma’s strategic worth is also seen in its contribution to reduced mortality in developing economies and the uplift in economic growth that flows from improved productivity. Research suggests this promotes both equality and global security.

Such strategic benefits are also enjoyed by developed economies, as advances in the treatment of HIV, hepatitis and cancer, reduce demand for palliative care. This relieves pressure on finite health care budgets and, again, boosts productivity.

Top ten fund holding GlaxoSmithKline is a case in point. It trades at a discount to benchmark and peer group, but has the second largest HIV business and a very strong presence in the strategically important area of vaccines.

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Theme 5: Data growth

Stock idea: BT

'Consumers have a seemingly insatiable appetite for data. Industry forecasts give strong suggestion that data demand will continue to grow for the foreseeable future, as more of us use mobile devices to stream music and video and interact on social media.

'A further and growing contribution is likely to made as the Internet of Things (connected cars, TVs, fridges, etc.) becomes embedded in our daily lives and wearable technology reaches mass adoption.

'Despite this compelling backdrop, however, telecoms businesses continue to trade on very modest earnings multiples; critics citing a trend to consumer tariff price disinflation and revenue pressures. But we smell opportunity.

'Whilst data may be commoditised, its unchecked growth affords ample scope to profit and there are signs that telecoms providers have grasped the nettle. From more for moredata tariffs, to converged offerings and content strategies, the telecoms industry is exploiting this opportunity.

'Theme holding and bellwether BT Group is representative. Historic circumstances have left the shares trading at depressed valuations, but this ignores the attractive growth potential of its strong consumer business.'

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