Shires Income PLC

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An update from our investment manager, Iain Pyle - 20 October 2020

The valuations of UK equities remain highly dispersed and share prices remain volatile as the market still looks for clear direction on the recovery from the Covid-19 pandemic and the economic impact. The top and bottom quintiles of the market on valuation are as dispersed as they have ever been and stable growth stocks continue to attract a significant valuation premium. We retain a relatively cautious view in the short term. The UK economy has so far proved resilient, but has been helped significantly by unprecedented government support and we need to see how the situation changes as this is withdrawn towards the end of the year. In the near term we also have to navigate the end of Brexit negotiations, a US presidential election and a likely increase in movement restrictions for many. Longer term, however, we are more constructive. The timing of a working vaccine against Covid-19 may be uncertain, but early trial results have been positive and the scale and focus of efforts on the vaccine will surely yield positive results within our investment time horizon. The Presidential election may also be the driver of a change in the market direction, with a Democrat victory likely to lead to more inflationary economic policy, benefitting value and income stocks. 

Investing for income has proved difficult this year with many companies cutting dividends. Equity income as an asset class has therefore struggled. However, we are now starting to see companies resume dividend payments again and there are still many companies growing shareholder distributions, even in what is a particularly challenging year. As we move into 2021 we should expect these trends to continue, improving the outlook for income investors..

The Trust has not been immune from dividend cuts this year, but the high level of income we receive from preference shares has allowed us to hold a broader range of stocks and to outperform the benchmark. This shows that if we can find the right companies, even in challenged sectors, then there are still attractive income opportunities out there and that they can lead to outperformance. If we take a longer term view, better economic data and the resumption of dividend payments for many stocks should allow income to recover – but picking the right names with the right cashflow characteristics will remain key.