The UK: rebooted

Ben Ritchie, Rebecca Maclean, Co-Managers, Dunedin Income Growth Investment Trust plc

• British companies are poised to benefit from a drive for faster economic growth in the UK

• The new government is targeting an annual 2.5% rise in GDP, fuelled by planning and infrastructure development, alongside initiatives on clean energy and a focus on enhancing productivity

• UK companies are playing their role in driving innovation and providing investment capital

The incoming UK government has promised a decade of national renewal. Its growth strategy has been designed to drive investment to specific parts of the economy such as infrastructure and housebuilding. At the same time, British companies are playing their part in generating growth, and boosting innovation. Here at Dunedin Income Growth Investment Trust (DIGIT) we believe renewal is possible and the companies in which we invest can be front and centre of this change.

The UK economy has seen anaemic growth for much of the past decade. There have been some significant distractions – from referenda to Covid – that have drawn attention away from policy, while productivity has been weak. Labour’s target of an annual 2.5% rise in GDP may look unambitious compared to the UK’s growth rate in the 1990s and early 2000s but would be a meaningful improvement on recent history.

If the new government manages to deliver growth at these levels, it would provide an encouraging backdrop for UK companies overall. That said, there are specific areas that look likely to benefit from a reboot of the UK economy.

Clean energy

The clean energy transition is a priority for the new government after a period when the stop-start on climate policy has been destabilising. Infrastructure development is lengthy and expensive; companies need clear regulatory parameters and policy to plan.

A lot has already happened even with the recent erratic policy. The ‘Great Grid Upgrade’ began in May, adapting the UK’s transmission and distribution infrastructure to meet the growing demand for electricity. National Grid estimates that electricity consumption in the UK will increase by approximately 50% by 2036 and more than double by 2050, placing increased pressure on the grid.

The distribution of energy generation will also change as renewable energy sources come on stream, with electricity generated by wind farms needing to move to the areas of greatest demand, particularly the UK’s major cities. National Grid and SSE, both holdings in DIGIT, are at the forefront of this change. SSE has a fast-growing renewables business and could benefit from clearer government support. The government also plans to include more renewables projects in its ‘Nationally Significant Infrastructure Projects’ regime, including onshore wind farms.

Planning and housebuilding

It is a pillar of the incoming government’s agenda to reform the planning system and unblock housing and infrastructure development. In its manifesto, it pledged to build 1.5 million homes in five years by streamlining planning and fast-tracking major infrastructure projects. The Planning and Infrastructure Bill, announced in mid-July, will "turbocharge building of houses and infrastructure", the government said.

This is a tough and controversial area. Local planning objections have often derailed housing development and plans to build on parts of the green belt are likely to be opposed. The bill promises resources to hire more planners and speed up applications. Local communities will only be able to determine “how, not if” new homes are built. More projects will be designated Nationally Significant Infrastructure Projects, giving final approval to the housing secretary.

Overall, this should support the UK’s construction industry. We hold Morgan Sindall and believe it may be a beneficiary of a more supportive environment. We also own Taylor Wimpey and a number of companies in the housing ecosystem – Genuit and Marshalls, for example – that could benefit from an unblocking of the pipeline of new houses and infrastructure.

Innovation

Investors should not underestimate the innovation happening within UK companies, independent of the actions of government. Contrary to the prevailing view of UK companies as stodgy and old-fashioned, we see many of the UK companies in which we invest at the forefront of global trends. For example, we hold a number of companies set to be part of the next wave of artificial intelligence. These include companies such as RELX, LSE and Softcat.

RELX, for example, is harnessing its extraordinary repository of data and content to build powerful analytics tools to deliver real insights to its customers. Its LexisNexis brand holds law case archives and helps lawyers to judge the probability of success for a particular action. LSE has built a significant data and analytics business, which generates around half of its revenues. It recently acquired Refinitiv and has built a partnership with Microsoft that is helping it build new analytical tools and improve its customer experience. Softcat meanwhile is central to the provision of software and hardware to UK businesses and poised to benefit from increased spending.

While companies are forging their own path, a supportive ecosystem and funding regime is helpful. The incoming government is making encouraging noises around this, saying it will be ‘pro-business’ and ‘pro-growth’. Chancellor Rachel Reeves has promised to build on Jeremy Hunt’s Mansion House reforms, which sought to shore up the UK’s capital markets and direct pension fund capital towards early-stage businesses.

Stability is, of itself, important. Investment levels in the UK economy have been low. Companies need a stable environment, and reassurance that the rules won’t change before committing to large scale and long-term plans. The strength of the new government’s majority, and the clarity of its strategy should go some way to deliver business confidence.

We believe our strategy is poised to take advantage of this shift in the British economy as it emerges. DIGIT is focused on total return. We have an income focussed strategy but are not looking simply for the highest yields, but for companies offering a balance between dividends today and growth tomorrow. That allows us to include companies pushing capital towards innovation and benefiting from this new environment.

There are signs that sentiment is starting to turn. After years of outflows from UK equities, the Financial Times reported that major institutional investors are returning, while figures from Morningstar show three consecutive months of inflows into UK mid-cap stocks, which are often a bellwether for sentiment. An important reboot for the UK economy and financial markets may already be underway.  

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

Important information

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• Past performance is not a guide to future results.

• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.

• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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