We are pleased to present the audio version of our Winter 2025 edition of 1875.
TRANSCRIPT
Welcome to the audible version of Redmayne Bentley’s 1875 publication.
For the Winter 2025 edition we provide an outlook for the year ahead.
Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. There is an extra risk of losing money when shares are bought in some smaller companies. Redmayne Bentley has taken steps to ensure the accuracy of the information provided. Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares and investments mentioned.
Looking Ahead was written by Alastair Power, Investment Research Manager.
Post festive period, we have welcomed the new year with a somewhat rocky start. The usual early January practice of reading through financial market outlooks and consolidating thoughts with respect to the year ahead has been derailed and attention diverted by two headline grabbing events in the early weeks. Upward moves in UK government bond yields have been a common feature of financial news headlines, with some concerns raised over the associated decline in the value of sterling. Further comment is provided on this in our main article, but we would point to the fact that this isn’t an isolated move for the UK as government borrowing costs have been rising in both the US and Europe as markets have been adjusting expectations for interest rate movements. Alongside rising government borrowing costs, a US hedge fund is attempting to shake-up the UK’s investment trust sector. Having requisitioned seven companies for voting on changes to the board of director compositions and investment strategies, participants around the sector, which constitutes 335 companies and manages some £269bn of assets, have been vocal in their opposition. With voting occurring through the latter stages of January and into early February, some of the results will be known by the release of this edition of 1875 and we will be watching closely with great interest.
Within our Stock Focus article, TR Property Investment Trust, the diversified fund of Real Estate Investment Trusts (REITs) takes centre stage. The sector has experienced challenges in recent years following rising interest rates that has caused a resetting of both property valuations and the ratings of the REITs themselves. At the helm of the portfolio is a long-standing manager with a strong track record, having outperformed in twelve of the last thirteen calendar years while helping to produce the necessary income required to enable the board to increase the dividend on an annual basis over a long period of time. With a combination of healthy starting dividend yields, wide share price discounts to underlying net asset values, and the potential for positive earnings momentum, the REIT sector is one to watch in the year ahead.
Overall, there’s reason for positivity for the year ahead. Current yields on bonds are high and generally conducive to some strong forward-looking returns, although we could continue to see volatility in the longer maturity end of the market. Equities broadly start the year at undemanding valuations, with the exception of the US, where valuations remain high, and there is supportive optimism around the pro-growth stance of the Trump administration.
To add, 2025 is a very special year for Redmayne Bentley as we will celebrate our 150th anniversary in December. As we look ahead to this significant milestone, we want to thank our clients, readers and listeners.
Our Stock Focus article, on TR Property Investment Trust, was written by Ruth Harris, Investment Research Analyst.
Recent years have been challenging for interest rate sensitive alternative investments, such as Real Estate Investment Trusts (REITs). The FTSE EPRA Nareit Developed Europe Capped Index, which tracks the performance of listed European real estate companies, registered a total return of -29.9% over the three years to December 2024. However, many trusts now trade on significant discounts to Net Asset Value (NAV), offering attractive yields and the potential for significant capital gains in a more constructive economic environment.
While some REITs are focused on a certain sector or theme, TR Property is one UK-listed trust which diversifies its exposures across the UK and European property market. Marcus Phayre-Mudge has run the fund since 2011, providing stable and experienced management with the trust’s NAV return outperforming the benchmark in twelve of the last thirteen financial years. It primarily invests in other listed investment companies, with top holdings including Vonovia, the German residential real estate company, Klépierre, Europe’s second-biggest listed mall operator, and LondonMetric, which focuses on UK large triple net leases across industrial, leisure, and food retailing. In addition to the diversified real estate equity exposure, the trust also has a small allocation to direct UK property, owning four multi-let industrial sites in London, Gloucester, Bicester, and Northampton.
Despite a turbulent property market, TR Property reported strong interim results for the six months to September 2024, with a NAV total return of 10.9% and share price return of 13.0% both in excess of the benchmark FTSE EPRA Nareit Developed Europe Capped Index at 9.3%. Earnings per share generated were 8.16p, 12% ahead of the same period in the year prior. While looking to maintain a diversified exposure, the manager will take a view on different companies and sectors to aim of achieving better results than the benchmark.
For the reporting period, investments within European shopping centres, German residential, and UK diversified companies all contributed to outperformance. Valuations over the past year have also been supported by heightened levels of merger and acquisition activity in the portfolio. As interest rates have come down from their peak, the manager has shifted attention from defensive companies which can manage high debt, to companies with strong growth prospects and the financial position to take advantage of market opportunities. Despite the strong performance track record compared to the benchmark, TR Property trades at a discount of 5.47% to NAV reflecting investor sentiment around the REIT sector and poor absolute returns over the past three years. The discount may offer interested investors an attractive entry point for a long-term holding, and the trust offers a 5.30% yield at the current £2.97 share price, with dividends distributed semi-annually in January and August.
One challenge facing the trust is revenue generation, as many of the portfolio companies had to pause dividend distributions in 2022 following interest rate hikes and climbing debt costs. In many cases, dividends have been resumed at a lower level, and some companies have yet to resume distributions at all. The investment trust vehicle allows TR Property to smooth revenue reserves, and over the last five financial years TR Property has grown the dividend by an average of 4.5% per annum despite lagging underlying earnings. Revenue reserves remain healthy at £55.8m following the final 2024 payment, however investors will keenly watch earnings recovery moving forward.
While analysts at CBRE started 2025 with the prediction that ‘UK real estate capital value look poised to rebound’, increased UK economic uncertainty in recent weeks has cast some doubt over the outlook. Climbing yields in the bond market, worsening growth forecasts, and rising inflation expectations have sparked fears of stagflation and dragged on interest rate sensitive companies, especially those exposed to changes in debt costs or less able to capture inflation in leases with long review periods. However, companies with high pricing power or leases linked to inflation will have a degree of protection, though may still suffer the effects of falling underlying property values.
TR Property may be well placed to weather the storm, given the strong track record of management and blend of geography and sector exposures. While financial market participants are expecting a ‘higher for longer’ rate environment in the UK, cuts in Europe are expected to be quicker given cooling inflation and weak growth, which may be constructive for the real estate market. Given the discount and attractive yield, as well as the possibility of a growing income and capital, TR Property may see renewed interest from investors in 2025 despite macroeconomic unease weighing on sentiment.
Our Topic of the Month, 2025 Outlook, was written by Alastair Power, Investment Research Manager.
2024 was a year where performance tables were dominated by larger US Companies, mostly via a small cohort of names at the top of the index with links to the Artificial Intelligence (AI) industry. Indications are that optimism around the outlook for the US remains, despite current lofty valuations, on expectations of tax cuts and pro-business policies from President Trump and a broadening of the benefits of AI. Investors cast their votes for the US through the year with US equity exchange traded funds seeing significant inflows through 2024. Going forward, the continued flow of assets to the US is expected to support valuations along with optimism around the new administration, but this will need to be underpinned by strong earnings performance.
Meanwhile, the issue of persistent outflows from our domestic equity market continues, with UK focused funds experiencing their nineth year of outflows according to data provider Calastone. Subdued business and consumer confidence remains an issue following the Autumn Budget and this sentiment is expected to persist through the year ahead. Increases in National Insurance (NI) and the National Living Wage have had negative implications for labour heavy industries such as retail and hospitality. Price rises are fully expected with insufficient margins or rates of productivity able to absorb the increased costs. UK equities, via the FTSE All Share, now trading at nearly a 50% discount to the US on a valuation basis and, with the recent devaluation of sterling, we could see 2025 being another busy year for merger and acquisition activity. Looking through the gloom, it’s worth remembering the numerous UK listed companies, such as Rolls Royce, Marks and Spencer, and Imperial Brands, produced strong returns for shareholders in 2024.
Away from the UK and US, European equity markets have some hurdles to overcome in the early stages of 2025. Most notably within the key automotive and luxury consumer goods sectors given implications of touted tariffs and declining Chinese demand. In addressing the continued fall-out of issues within their property market, Chinese authorities are still unveiling policies aimed at stimulating the economy.
Looking into 2025, an apparent unifying theme across equity markets is the persistent uncertainty of politics.
2024 was a good year for fixed income, or bonds, with pockets of strong returns across the asset class. Recent performance of government bonds has disappointed and financial headlines have been dominated by the rising cost of government borrowing, especially in the UK. This isn’t a UK specific issue, as borrowing costs in the country have been rising in line with those of the US and Europe, albeit at a faster rate. Concerns have been raised over the remaining headroom within Chancellor Rachel Reeves’ fiscal rules, but technical moves in government bond markets are likely a lesser cause for concern than the implications of slower than expected rate of GDP growth. The Office for Budget Responsibility (OBR) forecasts linked to the Autumn Budget, expect real, or inflation adjusted, GDP growth of 2.0% and 1.8% in 2025 and 2026 respectively. Focus is likely to be on these figures throughout the year, with underperformance capable of causing more volatility. A key risk remains that Labour’s budget entirely relies on government consumption and investment to drive real GDP growth. Higher yields both reduce the amount of potential borrowing and increase the return hurdle over which the return on investment must achieve to be profitable. Then there’s the challenge of deploying capital into the economy, which shouldn’t be understated. All of which could assist in keeping upward pressure on borrowing costs and lead to either further taxation or spending cuts, or both.
In the meantime, attention is on the US, with President Trump in the early stages of his second term. Recent strong economic data in the US has led markets to reprice expectations for the number of Federal Reserve interest rate cuts to two for the calendar year. Treasury yields across all maturities have moved higher, taking other developed market yields with them, making it unlikely for UK government borrowing costs to move lower without being led by the US.
Within the corporate bond markets, the additional yield for lending to a corporate over a government for the same maturity remains tight, trading at levels last seen in 2021. The question throughout the year remains whether the compensation demanded for the additional risk increases but, with yields remaining attractive to investors and positive on an inflation adjusted basis, there is expected to be enough yield focused buying and a limited enough new supply to keep valuations at tight levels.
Bonds are expected to remain a key constituent of portfolios with more moderated risk levels given the yields on offer. Despite concerns raised in the press over UK government borrowing rates, attraction remains, with tax efficiency on offer for those trading below face value.
Other income producing asset classes such as Real Estate Investment Trusts (REITs) and listed infrastructure funds, which often feature in portfolios for their ability to access the benefits of physical assets through a liquid and diversified vehicle, are worth watching throughout 2025. Shares of these companies have trended lower as government bond yields have risen, leading to large discounts and yields on offer in the sector. For the year ahead, there may be selective opportunities, and while returns are linked to bond yields, this can be mitigated by focusing on those with durable earnings growth profiles. A combination of high starting yields and modest earnings growth could prove profitable, improved further by valuation re-ratings.
While 2025 has had a rocky start, there’s a healthy level of optimism for the year ahead.
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