STOCKPICKER
WHAT I BOUGHT LAST
TICKING
OVER
iSHARES GLOBAL
INFRASTRUCTURE ETF
Coram’s James Sullivan says this fund fulfils a long-held desire to
build up his emerging markets exposure without overpaying for it
I
Artemis’ Ed Legget names three UK stocks
that are ignoring the uncertainty and quietly
increasing profits
T
HE OUTCOME OF THE ELECTION has
done little to dispel the uncertainty
surrounding the UK’s departure from
the EU. The outlines of the divorce
agreement, if one can be reached, are
unlikely to be known until 2019. Despite this lack of
clarity, the economy keeps on ticking over. Low
unemployment, rising wage growth and an
accelerating expansion in consumer borrowing
should continue to support consumer spending.
While this will not result in the hoped-for re-
balancing of the economy, it will, we believe, result
IF EARNINGS MULTIPLES OF
DOMESTIC STOCKS STRUGGLE
to move higher until there is more
certainty on Brexit, they will need to
increase earnings or pay a dividend
to generate returns. Housebuilders
such as Redrow should do both.
Structural undersupply and low
mortgage rates should make
returns on capital more sustainable
than share prices imply. The
government’s housing white paper
makes us confident easier planning
and the availability of the Help-to-
Buy scheme will underpin returns.
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in growth of around 2 per cent this year. Earnings
from many UK companies are also heading in the
right direction: the last results season brought more
positive than negative surprises on earnings. But
this politically inspired uncertainty could limit the
scope for the multiples of stocks focused on the
domestic economy to rise.
NOT ALL UK COMPANIES ARE
DEPENDENT ON THE DOMESTIC
ECONOMY. Prudential’s Asian
business is growing and there are
signs its recovery is broadening out
beyond China and Hong Kong. It
can grow profits organically at a
double-digit rate for the foreseeable
future, which is not reflected in a
P/E multiple of 12.5x. Prudential is
withdrawing from the UK annuities
market and may dispose of its “back
book” of business, freeing up capital
to be reinvested or returned to
shareholders.
ANOTHER UK-LISTED STOCK
PROSPERING OVERSEAS IS 3i.
European discount retailer Action
accounts for more than 25 per cent
of its portfolio. Action, similar to
B&M in the UK, is currently growing
its top and bottom line at more than
30 per cent by opening around 200
stores a year in Europe. It is one of
the only retailers where opening a
new store pays for itself in less than
a year. This puts it in the enviable
position of being able to pay out
significant dividends while still
funding its own growth.
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F IT WASN’T ALREADY, THEN
INFRASTRUCTURE HAS
BECOME something of a
buzzword since Donald Trump
built a large part of his manifesto
around his fiscal plans. New-to-market
actively managed funds are being launched to
capture the theme, but we question how
much of the optimism around the US planned
infrastructure spend is already priced in to
developed market companies.
For example, the iShares Global
Infrastructure ETF (dominated by developed
markets such as the US and Canada) has an
average price/earnings multiple of 20.48 and
a price/book of more than 2. This appears to
be fully valued, if not a little stretched.
We chose to continue building out our
exposure to infrastructure via the iShares
Emerging Markets Infrastructure ETF,
which has much lower price/earnings and
price/book multiples of just 12.62 and 1.47
respectively – acknowledging that there are
a number of state-owned enterprises within
the fund.
The ETF tracks the performance of an
index of 30 of the largest emerging market
companies active in the infrastructure
sector, resulting in a portfolio of exposures
predominantly to China, South America and
the ASEAN bloc.
We have long held a desire to build out
our ASEAN and broader emerging markets
exposure without overpaying for it. Via an
infrastructure theme, we have been able to
achieve this.
The largest holding in the fund at the
moment is Airports of Thailand, the operator
of six airports including Suvarnabhumi in
Bangkok, which can accommodate up to
45 million passengers and operates up to 76
flights an hour.
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Other notable holdings include:
• CCR Group, which operates a portfolio of
companies in road and rail transport. This
is one of the largest private infrastructure
conglomerates in Latin America and the
leader in the Brazilian sector.
• Korea Electric Power Corporation, the
largest electric utility company in South
Korea, responsible for 93 per cent of the
country’s electricity generation.
• Transneft, the largest oil pipeline company
in the world, operating more than 70,000
kilometres and transporting approximately
90 per cent of oil produced in Russia.
• CPFL Energia, the largest non-state-owned
energy generation and distribution
company in Brazil and the third biggest
electric utility company.
With broad emerging market indices trading
around their longer term averages and
commodity prices still relatively subdued,
there appears to be very material upside
potential in this theme. When that latent
value will be realised remains something of
an uncertainty, but buying “low” means one
isn’t overly reliant on a multi-billion dollar
fiscal project to maintain the rating.
James Sullivan is a director at Coram Asset
Management
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