Britain’s best businesses are entrenched, not retrenching

Mark Wharrier |02-Sep-2016

Britain’s best businesses are used to operating in challenging environments, so investors should focus on fundamentals rather than macroeconomics.


Macroeconomic concerns

It’s easy for investors to be overwhelmed by the latest macroeconomic concerns buffeting markets, but equally it’s just as easy to forget there is always some grand issue shaping the market narrative.

At the moment, for example, market commentary is dominated by Brexit. But think back to the start of the year when everybody was talking about increasing interest rates. Indeed, there has been some imminent crisis threatening the market ever since the crash in 2008.

Equities have nevertheless broadly continued to rise throughout this tumultuous period – one characterised by macro anxiety amid generally low economic growth and low inflation.

Yet this doesn’t mean that as investors we should become complacent. For evidence, consider how mining stocks have fared compared with the rest of the market in recent years. We ought to remember that fundamentals do matter.

We look for companies that have pricing power, a strong market position and a long-term approach to investing, and generate healthy returns on equity. That may sound like common sense, but more often than not investing should be about common sense.

We look for companies that have pricing power, a strong market position and a long-term approach to investing, and generate healthy returns on equity

The UK environment

Within the UK stock market, there are plenty of firms that match these criteria. One good example is Unilever, which boasts a particularly entrenched market position. Its foundation is its distribution network. No rival could buy – let alone build – its distribution channels in emerging markets. In India, for instance, Unilever has trained 70,000 female ‘micro-entrepreneurs’ to sell its products in rural communities (Source: Unilever Annual Report 2015). It takes decades to establish such brands and distribution networks.

ARM is another case in point, notwithstanding its recent acquisition by SoftBank. For a long time, ARM traded in response to Apple. If Apple released a strong set of results, ARM’s share price would be up the following day, and vice versa. But what we and SoftBank recognised was that Apple was just one of ARM’s customers. Unlike the short-term traders, we saw a company with an 85% market share in processors for mobile computing (Source: ARM). It not only enjoys huge barriers to entry in this space, but has vast growth potential as more and more devices become internet connected.

These are just two UK businesses – and there are plenty more, such as British American Tobacco, or the publisher and data provider RELX – that have thrived despite a seemingly difficult macroeconomic environment. We don’t expect that environment to change, and neither do we expect these companies’ performances within that environment to change. Far from retrenching against harsh headwinds, these businesses are entrenched market leaders, and we believe they will continue to prosper thanks to their exceptional fundamentals.

Mark Wharrier
Managing Director and Portfolio Manager, BlackRock UK Income Fund
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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 30 August 2016 and may change as subsequent conditions vary.