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Rathbones’ Stick: Extended period of rate rises will pressure economies

Carl Stick remains unconvinced that developed economies are robust enough to withstand an extended period of interest rate rises.

Rathbones’ Stick: Extended period of rate rises will pressure economies

Carl Stick remains unconvinced that developed economies are robust enough to withstand an extended period of interest rate rises.

This view, which he regards as contrarian, is prompting him to stick with quality stocks with dependable earnings streams, rather than dipping his toe into value, which is increasingly in vogue.

‘This is slightly counter to the prevailing market mood, but I am still concerned that over the last five years we haven’t seen resurgent economies. We have seen a lot of monetary impetus but we haven’t seen recovering economies,’ he said.

‘I remain to be convinced that the developed economies are actually robust enough to withstand an extended period of rate rises.’

The rotation into value seen since the summer has seen several bond proxies or quality growth names sell off, which Stick and his team have used as an opportunity to top existing holdings and add new names. At the same time, they have used rising expectation of higher rate rises to slightly reduce some more cyclical holdings.

Stick, the Citywire + rated manager of the Rathbone Income fund, said that over the past year his core large cap holdings, such as Reckitt Benckiser, Unilever, British American Tobacco and HSBC have been positive contributors to performance, benefiting from overseas earnings as sterling weakened sharply.

In contrast, several mid cap positions including ITV, Halfords and Greene King proved a drag on returns.

The strong performance of his US dollar-earning holdings has prompted him to review his existing positions and he has reduced exposure to one name for stock specific reasons.

‘We are looking at our overseas holdings, [particularly] our American holdings that did see quite a seesaw after [Donald] Trump’s election victory. We have lightened our position in BankUnited.’

He admits that he believes it remains a good business, but the demise of three reasons he had for owning the stock led him to decrease his stake.

First, Stick points to the retirement of BankUnited’s CEO John Kanas and although Stick believes that succession will ultimately be smooth, he was one of the main reasons to invest in the bank. The announcement of a successor has also ruled out a possible sale, which he cited as the second reason for his investment.

Thirdly, although the business will benefit from rising interest rates, Stick is nervous about whether the US economy can actually withstand an extended period of rises and warns that if the economy does tip into a recession, financials are likely to be hard hit.

The proceeds from that sale have gone into more defensive plays, namely Altria, a Phillip Morris brand in the US, and CWC Energy, a utility.

Rathbone Income is up 24.4% over three years compared to the Citywire UK Equity Income sector return of 18.9%. Over one year it has gained 6.6% versus the peer group’s 0.3%.

Stick said: ‘I don’t think that’s bad in a market that’s been really volatile and in the end people are buying our fund because they want to sleep easy at night.’

M&A plays

Stick particularly likes several businesses that have grown through acquisition, citing Bunzel, Micro Focus and DCC as examples.

‘If you have an entity that grows by acquisition, we need to be comfortable that the decisions they’re making are sensible and strategic, that they are by definition breaking down a barrier.’

With DCC, an Irish company focused on petrochemical distribution, he points out that the deals that it has struck have a few key dynamics that proved favourable.

‘The first one is they are buying assets from giant businesses like Shell, Exxon Mobile and Total, which are under stress because the oil price is low and they don’t want to have to worry about operations that are on their periphery,’ he said.

One such acquisition was Butagaz from Shell and because it was essentially the only viable buyer, due to its experience and competition rules in different countries, its assets were acquired at a very competitive price.

Meanwhile, Bunzel has a long standing track record of making small bolt-on acquisitions.

‘We are accepting of the fact that they’ve done this for many years and there is no evidence in recent history that they will be making a mistake,’ Stick said.

However, he admits that Micro Focus is a different story. The company recently announced its intention to acquire Hewlett Packard Enterprises in an $8.8 billion (£6.6 billion) deal, which will create one of the largest infrastructure software companies in the world. Although its share price reaction was positive, Stick stresses it is important to understand the intricacies of the deal.

Dividend cut fears

Stick highlights three stocks that continue to worry him over the outlook for their dividends: HSBC, GlaxoSmithKline and Royal Dutch Shell. ‘We are always slightly concerned we could see dividend cuts. But the environment has improved for them in the last six to nine months so the danger may be less,’ he said.

With Shell, Stick will monitor any updates around its March 2017 dividend payout, while at GSK, the concern is over the change in leadership with chief executive Andrew Witty due to leave next March to be replaced by Emma Walmsley.

Stick is worried that owing to her background in the consumer business, her strategy may involve a dividend cut, although he points out both companies have been bailed out by a strong dollar this year. 

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Carl Stick
Carl Stick Average Total Return:
54/91 in Equity - UK Equity Income (Performance over 3 years)

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