Shires Income PLC

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An update from our investment manager, Iain Pyle - 23 February 2021

A strong start to 2021 for markets quickly reversed in January as we saw Covid-19 cases rise sharply globally and restrictions increase. It is undoubtedly still a difficult time for individuals and for many companies and this is reflected by continued volatility in markets. This should not be unexpected, however, and the key number to watch in our view remains the number of people to have received a vaccine. The UK is performing best of all larger economies in this regard and looks set to hit its targets of vaccinating the most at risk groups by the end of February. This is a significant achievement and as we move through the year it could differentiate the economic performance of the UK compared to other countries. There are many caveats to the vaccination progress: only first doses have been administered and vaccine efficacy is reduced against new variants for example. However, data from Israel, which has led the world in the vaccine roll-out, shows a dramatic decrease in infection rates after the first dose. Furthermore, while vaccines are less effective at limiting infection from new variants, data suggests they remain very effective at reducing the risk of hospitalisation and death. These are the important figures, as hospitalisation of at-risk parts of society is the key limiting factor to opening up the economy.

UK equities as an asset class should be well positioned for a recovery scenario – and in recent weeks there has been a clear response to positive vaccination data in the strength of Sterling. We have also seen continued increase in benchmark bond yields. As bond yields rise we would expect to see an outperformance of value and commodities over long term growth companies. The UK index, with its heavy weighting to energy, miners and financials would be a beneficiary. The UK index has underperformed Europe by 30% since the 2016 referendum, a huge margin, and on earnings multiples it is at a relative trough versus other developed markets.

Importantly for Shires, a recovery should also allow for the resumption of dividend payments and for growth of pay-outs in the medium term. As stated above, dividends fell by almost half in 2020. Expectations are for modest growth in 2021 but we are already seeing companies resume payments and many management teams we speak to are emphasising the importance of distributions in delivering total shareholder return. For Shires, this provides many opportunities to find attractive sources of income and capital growth in 2021.