Shires Income PLC

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An update from our investment manager, Iain Pyle

Calling the direction of the market in the short term is incredibly difficult, as it largely hinges on the unpredictable spread of a novel virus and the success or failure of measures taken to counteract it. What can we say with some confidence? The experiences of China and Korea tell us that it will certainly get worse before it gets better in Western Europe and in the US, where the lack of access to healthcare for millions of residents should be a real concern. Cases will grow significantly and the shut-down of a large number of businesses will need to continue for some time. There is a likelihood that some businesses will be unable to service their fixed costs and will not survive. Others will need capital support leading to shareholder dilution and many will find it necessary to cut their dividend payments.

Why then should we maintain a constructive outlook for equities and remain invested? Firstly, the experience of countries that were first infected shows that just as things get worse, they also get better. New case formation will slow, infected people will recover and cases will reduce. Perhaps optimistically (but with some scientific basis) this will be helped by a seasonal shift in weather and the actions we are all taking today to reduce contact and improve hygiene. Although it will take time for normality to resume, the market is very good at looking through short term problems and valuations can recover quickly. As I write, the FTSE All-Share index is now 31% lower than at the start of the year – it still feels unlikely that in two years' time the earnings or cash generated by companies will be permanently reduced to this extent. Secondly, governments and central banks have already shown a willingness to support companies and to provide stimulus to markets. That should help companies avoid failure due to short term cessation of trading and also accelerate any recovery in economic activity. Some will still need capital from investors, but we should be ready to support good businesses. Distressed rights issues are often a source of very good returns, we just need to make sure we are not bailing out companies with poor business models that would fail in any case.

Finally, while we will see dividends cut, yields are currently very high across the market and may well still look attractive after a cut. The hope is that cuts will be temporary, with prudent companies understandably choosing to retain cash in a time of great uncertainty. In the near term, performance is likely to be volatile. For Shires Income, our main priority remains income generation so we continue to pay particular attention to the ability of our holdings to pay a dividend. It is also worth highlighting in this environment that the revenue reserve (equivalent to around one year's dividend) provides a large amount of protection should we need it.