BLACKROCK NORTH AMERICAN INCOME TRUST PLC

Investing in a changing world

The global economy is slowly recovering from the havoc wrought by COVID-19. Market leadership is changing and there is greater clarity on the future. Tony DeSpirito, Co-Manager of the BlackRock North American Income Trust plc, explains how the portfolio is being managed through these turbulent times.

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.

The world that emerges from the pandemic is likely to have changed in a number of crucial ways, from the way we use technology to the priorities for businesses. However, investing in 2021 will be more nuanced than simply targeting the beneficiaries of a ‘new normal’. How are we investing through this unusual period?

As the world economy slowly starts to recover from the virus, a few trends are clear: the pandemic has accelerated global reliance on technology, for example. The world has grown used to a low contact world and this is likely to continue with everything from ecommerce to payments.

The US/China trade war, pandemic and then Brexit have forced companies to address the global versus local debate. Lengthy supply chains look increasingly impractical and companies are willing to pay more for local suppliers to ensure consistency. US companies are beginning to bring some of their production capabilities back into the local market. The higher costs associated with local supply could see companies cut stock buybacks and cut back on mergers and acquisitions (M&A) or capital expenditure.

Equally, even as earnings return to normal, companies may also reconsider the level of debt they carry on their balance sheets. Companies are usually prepared for a recession, but they are not built for months and months of zero revenue growth. That may influence their view of borrowing and may see some companies cut back.

Environmental, social and governance (ESG) considerations are becoming very important, both for portfolio managers such as ourselves and for companies. Sustainability was a hot topic even before the emergence of COVID-19, but today companies are increasingly going to find themselves judged on how they treated their employees, their customers and their local economy.

Our analysis of recessions going back as far as 1978 suggests that the cheapest stocks get cheaper moving into a recession, but then turn as economic activity starts to pick up.

Focusing on recovery

These are sustainable and enduring trends. However, ensuring they are reflected in a portfolio is not straightforward. We need to take into account, for example, that the valuations for the highest profile technology stocks are extremely high. Market gains in 2020 were dominated by just a handful of stocks and the market is becoming increasingly concentrated.

Equally, we need to be careful that the gains made by these companies are sustainable. Some companies are likely to have merely brought forward demand from the future. When restrictions are lifted, will anyone want to sit in front of a boxset? These are important considerations for streaming services.

We must also take into account the recovery. News on the vaccine rollout has seen a tentative shift towards more economically-sensitive parts of the market after a long period when this type of stock was out of favour. This is to be expected. Our analysis of recessions going back as far as 1978 suggests that the cheapest stocks get cheaper moving into a recession, but then turn as economic activity starts to pick up. This trend may be even stronger this time round because the disparity in valuations is more extreme.

Again, selectivity is needed. While some leisure stocks have bounced from their lows, this is likely to be short term. It is difficult to see people rushing to get back on a crowded airplane, theme park or movie theatre. There needs to be some quality control.

Portfolio themes

What is our solution to the world we find ourselves in? We believe the rotation into economically-sensitive and value areas of the market will continue. Corporate earnings are likely to matter a lot more in 2021 and cyclical companies have far easier year-on-year comparisons because of their weakness this year. There have been a lot of false starts for value, but we believe this one should endure.

We hold a number of stocks that should benefit from economic recovery when it emerges. However, we also want to protect our investors against heightened volatility. So, we are combining recovery-sensitive areas such as financials and energy with more stable areas such as information technology and healthcare. However, for all of our holdings, we continue to focus on quality – that means a strong management team, healthy balance sheet and dividend growth.  

Dividend growth could be particularly important for 2021. In the short term, interest rates are likely to remain low and dividend stocks should find favour as investors hunt for income. Over the longer term, companies that exhibit dividend growth have delivered a competitive return with downside protection. We believe the wave of dividend cuts seen in 2020 are now behind us.

The world is finding its way out of the crisis, but it is a slow process. As such, we believe a ‘barbell’ approach (an investment concept that suggests that the best way to strike a balance between reward and risk is to invest in the two extremes of high risk and no risk assets while avoiding middle-of-the-road choices), that recognises both the need for stability and the opportunities inherent in recovery, is the right one.

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 from BlackRock as of January 2021 and may change as subsequent conditions vary.

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