Positive year despite increasing UK focus for STS Global Income & Growth Trust

STS Global Income & Growth Trust (STS) announced its annual report for the year ended 31 March 2024. The NAV total return for the year was +4.8%, and the share price total return was +6.1%, compared to a total return of +11.5% in the Lipper Global – Equity Global Income Index. This compares to a net asset value total return of -1.8%, a share price total return of -4.8% and a total return of +0.5% in the Lipper Global – Equity Global Income Index in the previous year. The company also announced that its dividend target for the year is 6.54 pence per share, an increase of 5.5% from the prior year.

Commenting on the results, portfolio manager James Harries noted:

“Global equity markets began 2024 with a flourish, delivering most of the gain for the year to 31 March 2024 in the last few months. Investors anticipated an economic recovery – about which we are sceptical – leading the best performing sectors to be more cyclical areas such as extractive industries, banks and industrial companies. These are periods in markets when Troy’s quality focussed, conservative approach tends to lag, and this was no exception.

“This optimism was further enhanced by the ongoing enthusiasm among investors for all companies that are perceived to be beneficiaries of the adoption of artificial intelligence (‘AI’). This is best demonstrated by the US semiconductor company, Nvidia, which appreciated by +225.4% in the year and now has a market capitalisation of $2.2 trillion. Truly, these are remarkable times.

“While we believe that AI is an important and transformative technology, we wonder if we are seeing the usual initial burst of excitement which will ultimately prove to be transitory before the effects of the technology on the real economy, and hopefully productivity, play out over several years. We continue to remain focused on quality businesses that generate cash and pay dividends. We have a somewhat cautious view of the current market exuberance”.

Regarding the outlook, he continued;

“We continue to see equity markets as fully priced both in absolute terms and relative to their own history. While economic data, especially in the US, has been surprisingly resilient this has had the effect of making inflation more persistent and interest rate cuts, upon which recent exuberance partly rests, less likely. That this is happening following the largest and most rapid rise in interest rates in 40 years warrants a cautious approach.

“We also question the longevity of the upward move in markets predicated on the rapid adoption of AI across the economy. Investors have a tendency, known as Amara’s Law, to over-estimate the effects of a new technology in the short term but underestimate it in the longer term. Consistent with this would be a lull between the rapid build out of the infrastructure currently being deployed, and productive AI usage in the real economy. The former may well be short-lived whereas the latter opportunity may well play out over years. If this turns out to be correct investors may face severe losses in the near term as valuations prove hard to justify. This happened to hardware manufacturers such as Alcatel and Lucent following the dot com boom in 2000.

“By comparison our portfolio is generating a 5.2% free cash flow yield that we expect to grow persistently even in the event of a more challenging economic backdrop. This is partly owing to the exceptional value we see in high quality, global companies listed in the UK. As a result, we have a material proportion of the portfolio invested in this country.

“The combination of attractive returns on capital underpinning steady growth in free cash flow and dividends, together with long term capital growth, should produce decent and dependable returns even in the event of an economic slowdown. While there has been much that has fired investors’ imaginations recently, the gains enjoyed may not survive either a slower than expected adoption of new technologies or earnings driven disappointment as the economy slows. Under such scenarios we have confidence in the resilience of our portfolio companies and our ability to deliver dependable income growth and capital gains in the coming years.”

STS : Positive year despite increasing UK focus for STS Global Income & Growth Trust