BLACKROCK INCOME AND GROWTH INVESTMENT TRUST PLC

The UK post-pandemic revival

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The UK is back on its feet after a tough pandemic and protracted Brexit negotiations, says David Goldman, Co-Manager of the BlackRock Income and Growth Investment Trust plc.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

UK has been a tough place to invest in recent years, but a skeleton Brexit deal and a successful vaccine rollout are drawing investors back to the market. For the BlackRock Income and Growth Investment Trust, the key is to find those companies with long-term, sustainable cash flows and pricing power, that can invest for the future but still pay dividends to shareholders. It’s a tall order, but there are plenty of opportunities.

After the profound economic hit from the pandemic, green shoots are emerging. There has been huge central bank and government support for the economy. Money supply has hit a peace-time record. These measures have helped keep the economy on its feet in spite of the difficulties of the pandemic and put it in a good position for recovery.

Equally, the partial resolution of Brexit means companies can begin long-term planning. In the recent budget, the Chancellor tried to give a longer-term framework around corporate taxation. He helped companies plan for future investments and put incentives in place for those investments. Visibility for corporates is steadily improving as economies recover and progress is made politically and in the fight against the pandemic.

The UK has been out of favour for some time and remains an attractive market relative to its international peers and relative to its history.

UK shake-out

The pandemic also provided a much-needed shake-out of UK companies. The UK has historically been one of the highest-yielding markets in the developed world, but too many companies were paying dividends at the expense of investing in their businesses. Companies that were over-distributing on dividends have been ‘found out’ during this crisis and forced to rethink their payouts. This means that dividends in the UK market are now far healthier and more sustainable than they have been for many years.

We can find plenty of businesses for our portfolio that generate sufficient cash to invest in their businesses but are also sufficiently cash generative that they can pay a growing dividend as well. We have businesses in the Trust that have grown their dividends for over 50 years. This compounding effect is a valuable contributor to total return over time.

Valuations still look appealing in the UK market, even after some recent recovery in UK shares. The UK has been out of favour for some time and remains an attractive market relative to its international peers and relative to its history. We invest selectively outside the UK as well, allowing us to introduce themes – such as payment systems or renewable energy – that aren’t represented in the UK market.

Our portfolio

The economic recovery is building momentum globally. As such, we have been tilting the emphasis in the Trust towards those shares we expect to benefit from that recovery and from the reopening of societies. These include companies in the more economically sensitive areas of financials, support services and consumer discretionary companies.

That said, the risks are finely balanced, so we retain holdings in the healthcare and consumer staples space, where we find companies with strong free cash flow and dividend growth potential at attractive valuations. As always, our greatest focus is on the individual companies, finding cash generative businesses that are rewarding shareholders and reinvesting in the business.

At BlackRock, we have significant analytical resources at our fingertips, and this has proved particularly important when assessing the environmental, social and governance (ESG) risks for companies. We believe that companies need to operate within healthy ecosystems if they are to thrive over the long term. That means developing sustainable relationships with all stakeholders including suppliers, customers, employees and shareholders. When we talk to companies, we seek those demonstrating the right behaviours. For us, this is not separate to the investment case, but integral to it.

We believe this is a fertile time to be investing in the UK. The economy is emerging from a difficult time, but UK companies should emerge stronger and more resilient.