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James Sullivan
Head of Partnerships
Key
Simon Murphy, VT Tyndall Real Income Fund [SM]
Felix Wintle, VT Tyndall North American Fund [FW]
Richard Scrope, VT Tyndall Global Fund [RS]
1. What is your outlook for global inflation?
SM (UK Equity Income):
We have argued for some time that we are in a more inflationary environment than that which we’ve been used to over the last 15-20 years and this will have meaningful implications for stock markets. We never believed the ‘transitory’ narrative.
FW (North America):
It will remain high and sticky but will start to fall in some components over the summer. Many of the measures that go into CPI will start to lap enormous comparisons, meaning that the rate of change will start to slow. Costs for consumers though are likely to stay elevated for the time being.
RS (Global):
Although we are probably past the point of peak inflation and headline rates are likely to decrease sequentially, we expect that we should be prepared for a protracted period of higher inflation than what we have experienced in the past.
2. What does a tighter monetary policy mean for equity markets?
FW (North America):
It’s not true to say the tightening is always bad for equity markets, markets can perform when rates are going up. It really depends on what the prevailing growth in the economy is like.
RS (Global):
Both equity and bond markets have been beneficiaries from the era of quantitative easing and thus an era of quantitative tightening should prove to be a headwind. However, both QT and higher interest rates are likely to have a dampening effect on inflation, with the former probably having a greater impact, which in turn should favour equity markets.
FW (North America):
The market is not handling the rising rate environment well this time because growth is slowing as the Fed tightens. This is not a good set up for equity markets.
3. Are we heading towards recession?
SM (UK Equity Income):
Markets are certainly fearful that we are heading for recession and many highly cyclical areas of the equity market have seen material share price weakness. We are more upbeat than most in this respect. We think the world still has a significant degree of ‘reopening’ to do, as we emerge from the long shadow of Covid, supported by strong balance sheets, and healthy labour and housing markets.
RS (Global):
The headwinds facing markets and the uncomfortable geo-political environment has certainly increased the probability of a recession. However, we expect that this will serve to be a mid-cycle slowdown rather than a recession.
FW (North America):
Recessions are usually defined as two quarters of negative growth; will we get there in the US? It’s not clear.
4. Is it too simplistic to look at life through a Growth v Value lens?
FW (North America):
It can be a useful shorthand but yes overall I believe it is a bit too simplistic.
SM (UK Equity Income):
In a word, yes. We’ve always believed there is an attractive price for almost any equity. A so called ‘poor’ company can be a great investment if you pay a cheap enough price at point of entry. Likewise, as many are finding out in the current environment, ‘quality/ high growth’ companies can be very poor investments if you pay too high a price.
FW (North America):
There are many moving parts to equity markets, in terms of what moves, when and by how much and often the best approach is to be flexible enough to have both exposures in the portfolio at the same time. Investors have been convinced by the industry that funds must be just growth or just value.
RS (Global):
We have always believed in finding quality companies regardless of whether the market deems them ‘growth’ or ‘value’, as quality companies can be found in either. We cannot, however, be complacent about valuations.
5. Which sectors or themes exhibit the best value looking forward?
SM (UK Equity Income):
We are currently finding excellent value in several UK domestic economy related sectors (e.g., house building, retail, leisure) where many strong franchises have seen significant share price falls as recession worries continue to mount and where, as noted previously, we are more optimistic.
RS (Global):
Proven business models and high gross margins are often good themes to choose during periods of market tightness. Healthcare companies, overall, remain on relatively low valuations and despite the constant risk of regulation on pricing and patent protection.
FW (North America):
I agree, the healthcare sector is offers great value, particularly the Pharma sector, where single figure PE ratios are common, alongside generous dividend yields and healthy balance sheets. We also like Energy which is also cheap and has been underinvested in.
6. And finally, name one stock in your fund that fills you with optimism and why?
RS (Global):
Booking Holdings faced an Armageddon scenario as the pandemic hit and has yet to fully recover. Booking is the best-in-class operator in online travel and has the highest weighting to Europe of all the major online travel agents (OTAs), as well as the largest exposure to business travel. The company is net cash positive and post the pandemic has an undemanding P/E.
SM (UK Equity Income):
Vistry Group is a UK house builder run by an experienced CEO who is one of the best operators in the business. The business is currently trading exceptionally well with strong demand for housing and disciplined supply ensuring house price inflation is more than offsetting cost pressures, has a solid balance sheet and generates excellent cashflow. The shares currently trade on a P/e of c.5.5x and pay a dividend yield of c.9%.
FW (North America):
Liberty Media which owns the rights to F1 Racing. This sport has risen from the ashes in terms of its popularity. It is now the fastest growing sport in terms of audience, and has cracked the US market with help from the Netflix documentary Drive to Survive. The racing has become more exciting and now 3 races in the USA and a swath of exciting new drivers the sport’s popularity looks set to continue its rise, as does its monetisation.