In this weekly video portfolio managers Gareth Brown and Harvey Migotti talk about the impact of the reopening in the UK and its effect on some of the stocks in the International Shares Fund portfolio.
Although the UK was impacted by COVID-19 worse than any other developed country in the world, restrictions are set to be eased due to its accelerated vaccine rollout with more than 50% of the population having had at least one shot.
Gareth and Harvey discuss the influence that this rollout is having on the economy including the way in which the Fund is exposed to the reopening through investments in companies like Lloyds (LSE:LLOY), Card Factory plc (LSE:CARD) and Motorpoint (LSE:MOTR).
I’m Gareth Brown and today I’m joined by Harvey Migotti, my fellow Portfolio Manager on the Forager International Shares Fund. We are here today to talk everything COVID-19 related in the UK, the impact of the reopening and its effect on some of the stocks in our portfolio.
First, I’ll give you some statistics. The UK were hit by COVID-19 worse than any other developed country in the world. New cases peaked at around 60,000 a day in January, which is just four months ago. It’s down more than 97% since then. Deaths have also followed suit from more than 1200 a day in late January to less than 10 a day today.
So how did the UK get here? There’s no doubt lockdown helped in getting to them to this point, but vaccinations have also been undeniably important. The UK has administered 78 doses per 100 head of population, more than 25% of the population are fully vaccinated, including the nation’s most vulnerable people.
And then in total more than 50% of people have received one shot, which already confers significant protection. But the UK economy has been open for about a month now with no major spike. We’ve also seen data out of Israel, which is another country that’s had a very high vaccination rate and they’ve been reopened for a little bit longer, with no major spike. Effectively, the disease is going away. How is that playing out in the numbers?
We can clearly see from all the photos in the pubs of people going out and enjoying their lives again, the reopening is been met with a lot of enthusiasm from people that have been locked down for a long time, but the economic data has been really strong as well.
You can see that house prices are up 10% year on year. Finally, after many years of being dampened the overall macro data has also been strong. You’re starting to see it reflected in the share prices as well, but there is potential there to suppress to the upside and I think certain people are certainly not positioned fully yet.
So let’s move on to stocks. We’ve mentioned several positions in the latest in the April monthly report, including some that could be new to our investors.
There’s a number of new positions that we have in the UK. I think one of the ones that we bought a few months ago and have been buying in and out of the Fund over the last few years is Lloyd’s, one of the UKs largest banks. It’s a very steady company, good balance sheet trading at a significant discount to book value. Even though it’s had a decent run, it’s still well below pre-COVID levels. A lot of the other banks that you look at and other companies around the world have recovered to more normalized share price levels. But these ones that have been left behind are just starting the rally now.
I think some of those tailwinds are helping us with Motorpoint as well, which is one of our top 10 positions. It’s a car dealership in the UK, one of the largest used car dealership networks in the UK, and in my opinion, clearly the best. It generates really impressive returns on capital and going forward, we are going to be making profitability out of that business. They’ll be able to reinvest at higher rates of return while returning capital to shareholders. What about something at the pointier end here? I know there’s a couple in the portfolio and one that we’ve talked about in the latest letter.
So a few months ago we bought something called Card Factory. It might sound obvious, but they sell greeting cards. It’s the biggest player in the UK, it might not sound like a very attractive business on the surface, but it’s a business that is consistently generated a lot of cashflow and paid a lot of dividends over the past few years. It got absolutely slammed as COVID happened and as they shut down their stores and people move to more digital greeting cards. So it’s been really interesting because the stock is still well below it’s previous price levels and still trading at very attractive multiples on a normalized earnings basis.
There’s a fair probability of some boom years here. We’ve got a lot of weddings that didn’t happen and catch-up birthday parties.
I can just imagine the next few months are going to be really good for them. Things could recover much quicker than people expect. So it’s decent sized position for us. It’s moved up pretty nicely already, but we see a lot more upside there.
It’s been a long year and the UK has suffered more than most, but the vaccination program is working. And the UK will be one of the first major economies to emerge out the other side. That combined with some of the cheapest stocks in the developed world, we think it is a potent mix for future returns. Thank you for joining us.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.