Rising bid activity and falling input costs are likely to be key drivers of global stock markets in the coming years, according to Finsbury Growth & Income investment trust manager Nick Train (pictured), who suggests that this could led to further gains for so-called bond proxies. 
The FE Alpha Manager is, by his own admission, a perennial “raging bull”, but argues there are only a handful of stocks in developed markets that are worth buying. He tends to opt for ‘blue chip’ firms with non-cyclical businesses and strong records on dividends.
Many of these, such as Unilever which is the Finsbury Growth & Income trust’s largest position, have however been heralded as too expensive and liable to an imminent crash of late.
Traditionally bought for the apparent steadiness and reliability of their dividends as well as capital protection from broader cyclical movements within the economy, these stocks have seen an increase in popularity from investors fleeing fixed income holdings.
Performance of stock versus index over 3yrs
Source: FE Analytics
This has given them ‘bond proxy’ status and, according to some commentators, increased their vulnerability should the fixed income market crash.
Train argues, however, that there is plenty happening to keep Unilever and other similar firms rallying for the next few years with the worries over ‘bond proxies’ proving to be overdone.
He says a combination of cheaper input costs and M&A-derived savings will likely cause an unanticipated profit boom, which could be even further boosted by cheaper energy feeding through as well as improving consumer confidence and spending.
“According to the Bloomberg M&A tracker, 2015 was the biggest year ever for global deal-making. There was over $5.6 trn of deals in 2015, struck at an average premium of 24 per cent. That total was up 27 per cent on 2014 and more than 16 per cent over the previous peak year of 2007,” he said.
“So far in 2016 there have already been circa 11,000 announced transactions, amounting to $1.2 trn – at pretty much the same run rate as last year. The announced merger between the London Stock Exchange and its German counterpart is the most immediately relevant for Finsbury Growth & Income.”
“Meanwhile, it is commonly held that equity markets are expensive and afflicted by numerous macroeconomic problems. We think it is important to listen to what business is saying about its opportunities for growth and the strategic values it sees in stock markets and to ignore the macro-pessimists.”
Train adds that many firms which feature in his portfolio are bullish on their own prospects in contrast to investors’ views of the broader market, shown by the rising tide for bid activity.
“Not only do companies self-evidently see value in stock markets, their investors are willing to reward them for getting on with it. This is great news because it is clear from a historical perspective that successive waves of M&A have been instrumental in the propagation of more successful corporate cultures or more advanced technologies,” he said.
“The stronger and smarter assimilate the weaker or more backward. Takeovers are the means whereby ‘creative destruction’ is actually delivered. For instance we know the profit margin uplift achieved by 3G and related parties after the takeovers of Anheuser Busch, Heinz and now Kraft has electrified industry participants – raising the bar for other quoted consumer brand owners, or certainly those who wish to maintain their independence.”
Train says gains in productivity are possible for these firms due to with Mondelez and Unilever two shining examples.
“It is clear that the corporations know this too because we can see them behaving accordingly. A recurrent theme at our meetings with companies is how much more they have still to gain from ‘zero-based budgeting’ [ZBB] and productivity to be derived from technology.”
“For Mondelez the appearance of an activist investor on its share register has undoubtedly accelerated the pace of its rationalisation and Unilever’s recent results revealed the benefits of its application of ZBB to cash flow and returns on invested capital. In addition, when you factor in the collapse of energy and raw material prices – oil close to its lowest inflation-adjusted price ever, according to Bloomberg – you have the basis for big positive earnings surprises as 2016 progresses.”
Train has one of the strongest long-term records of any UK-based equity manager of recent years. Over one, three, five and 10 years his trust is top quartile with it being the best in the sector since he took over more than 15 years ago.
Performance trust, sector and index since 2000
Source: FE Analytics
The trust has also outperformed the market for eight calendar years in a row.
Finsbury Growth & Income is on a premium of 0.4 per cent, has ongoing charges figure of 0.78 per cent and is 3 per cent geared.
