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Mark Barnett on Labour, energy, tobacco & sub-prime lending

Invesco Perpetual's AAA-rated Mark Barnett shares his thoughts on a variety of sectors as well as the outlook for the market in general.

Mark Barnett, head of UK equities at Invesco Perpetual, has backed the tobacco and utility sectors to recover after being hit by the threat of further government intervention.

Since taking responsibility for the £8.3 billion Invesco Perpetual Income fund from Neil Woodford on 6 March, Citywire AAA-rated Barnett has managed to outperform the index.

Through the month, the fund lost 0.8% while the FTSE All-Share index dropped 2.6%. That means that for the first quarter of the year, the fund has returned 2.3% compared with the index’s decline of 0.6%.

‘The UK stock market concluded the first quarter of 2014 in negative territory, despite the improving news on the UK economy at the macroeconomic level,’ Barnett (pictured) said.

‘The chancellor’s upbeat assessment of the economy in his Budget speech was more than offset by concerns over the outlook for emerging markets, most notably China. However, at a corporate level, there was negative newsflow for two UK sectors.

Life insurers were impacted by an announcement in the Budget which removed the rule requiring the mandatory purchase of annuities. Food retailers were hit by deteriorating sentiment towards the sector due to fears of pricing pressure. The Invesco Perpetual Income fund has minimal exposure to these sectors.’

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Barnett tipped the country’s electricity providers to bounce back this year after remarks by Ed Miliband late last year knocked billions off their valuations.

‘The share prices of SSE and Centrica fell sharply late last year following Labour’s commitment to an electricity price freeze and subsequent comments from the current government confirming a likely investigation into the industry,’ said Barnett.

‘Both companies’ shares have subsequently shown some recovery. SSE announced its own price freeze last month. This news was followed by news from Ofgem of a full competition industry review. This was well received by the stock market – the referral by Ofgem of the industry to the Competition Commission noted that there is no meaningful evidence of wrongdoing or excessive returns, but just that some elements of the market are not functioning optimally.

‘We expect the review to conclude that industry returns are not excessive, while moves such as that by SSE are already addressing the political agenda of pricing and transparency of margins.’

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Barnett likewise argued that regulation-induced negative sentiment on the tobacco sector was overdone.

‘Data from Australia showed that there had been minimal effect on consumption from the first year of plain packaging. Furthermore, there were signs that significant volume declines in Western Europe were levelling out.

‘The UK government resurrected the possibility of plain packaging in the UK last November, when it ordered a review of the evidence on its effectiveness and since month end has announced that it is “certainly minded” to oblige cigarettes to be sold in plain packets, without giving a firm date for doing so.’

Within the Invesco Perpetual Income portfolio, Barnett has major stakes in British American Tobacco and Imperial Tobacco.

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In another area that attracts regulatory interest, Barnett noted that Provident Financial was poised to profit from a new product focused on those unable to borrow from other lenders.

‘The company’s Vanquis credit card provides a credit card for people who cannot otherwise get access to one due to impaired credit history,’ Barnett said.

‘The company sees significant growth opportunities here as well as in a newer division – its Satsuma loans business. Satsuma is a new brand which competes in the short term loans business and Provident Financial has been working closely with the FCA to launch this product and crucially it leverages the existing infrastructure of the Vanquis call centre. The company is optimistic about the positioning of this product, which is differentiated from payday loans.’

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Barnett observed that he had benefited from the recent revival of IPO activity, and predicted that there would be more to come.

‘Two of the fund’s holdings in unquoted companies, Circassiaand Xeros, floated on the UK stock market last month, with an associated value uplift over book cost,’ he said.

‘Following the exceptionally strong stock market performance by the small cap end of the market of the past year and against an improving economic backdrop, we expect further announcements of IPOs and trade sales as the next two to three years unfold.’

However, the share prices of both Circassia and Xeros have fallen since they floated, by 7% and 15% respectively.

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Looking ahead, Barnett warned that the strong market rally would struggle to continue.

‘The UK stock market’s rise of 2013 was accompanied by an improving outlook for economic growth in the UK and US, but was not matched by an associated uplift in the earnings forecasts for companies,’ he stated.

‘Moreover, uncertainty about the strength of economic growth in emerging markets, especially China, is not supportive for the backdrop for global growth. With valuations now standing at a level anticipating upgrades to forecasts of corporate earnings, we believe that the performance of the market of the past year is unlikely to be repeated over the next 12 months.’

In such an environment, Barnett affirmed that he will remain focused on companies that can improve revenues and profits in a low-growth world, especially those with management teams that deliver sustainable long-term dividend growth.

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