Lord Rothschild: UK faces worst political crisis since Suez
Commenting on a ‘most difficult and treacherous year for investors’ in the investment trust’s 2018 annual report, Rothschild said political upheaval continued to exacerbate turbulent stock market conditions.
While the £3.2 billion multi-asset global fund did its best to protect investors’ capital last year, overcoming sharp declines in most asset classes to edge up RCP’s net asset value (NAV) by 0.8%, the share price was more volatile and, even with dividends included, shareholders saw a 1% decline in their investment.
Rothschild remained nervous about prospects for this year. Global growth was declining with a weakening Chinese economy leading to a contraction in Germany’s manufacturing output for the first time in four years, he said.
‘Against this weakening backdrop, geopolitical risks have not subsided. We are surely witnessing the worst political situation in the United Kingdom since the Suez crisis, while social unrest and populism in a number of European countries cloud the future,’ said Rothschild.
Rothschild’s reference to the joint invasion of Egypt by the UK, France and Israel to recapture the Suez canal is significant as the episode is said to have marked the end of the UK’s role as a global power. It angered the US, which forced the three allies to withdraw, while the canal remained blocked for shipping and Conservative prime minister Anthony resigned.
Then, as with the current wrangling over Brexit, the UK arguably took steps to diminish its influence and standing in the world.
The ongoing uncertainty over the prospects for the pound, the UK stock market and economy, exacerbated the volatility facing investors, said Rothschild, whose family own around 21% of the trust.
After falls of between 4.4% and 11% in most equity markets, and a 22.7% plunge in China, Rothschild suggested chickens had come home to roost following the emergency monetary response by central banks to the 2008 financial crisis.
‘The dangers of holding assets inflated by low interest rates and quantitative easing are now visible to all,’ said Rothschild, who pointed out that the trust’s net exposure to quoted equites was low at 47%.
‘Timely additions’ to government and gold and sales of more than 10% of long-only and equity hedge funds helped protect the trust in a flight to safety during the fourth quarter sell-off last year.
Vigilance was not being relaxed following the rebound in stock markets this year, which leave Rothschild and the team at J Rothschild Capital Management unconvinced.
‘We remain however cautious about future prospects for markets, concerned over the accumulation of downside risks,’ Rothschild said (pictured).
‘The question is whether current stock market valuations discount these concerns and take into account the likelihood that corporate profits are on the way down, undermined by reduced demand, increased wages, and higher input costs (due to tariffs). We therefore anticipate a continuation of heightened market volatility,’ he added.
Describing RIT Capital Partners’ stance as ‘cautious and selective’, Rothschild said the fund managers led by chief investment officer Ron Tabbouche looked for new investments in equity and debt markets that provided a ‘margin of safety’ in their valuation.
Just over a quarter of RCP is held in private equity investments in companies or funds investing off public stock markets. This was the strongest part of the portfolio, boosted by an increased stake in Acorn which merged its Keurig coffee business with Dr Pepper.
Along with positive returns from credit and bonds, these offset a more mixed performance in public equites where investments in funds in Japan and China in particular had a torrid time, although Rothschild said the fund remained committed to the region.
The company paid two dividends totalling 33p per share last year and intends to lift the payout by just over 3% to 34p this year. RCP shares yield 1.6% and at £20.60, up 5p today, trade at an 8.5% premium above Numis Securities’ estimated net asset value per share of £18.96 (the last official NAV per share was £18.65 at the end of January up 2.4% from December.
The premium makes RCP look expensive against other successful capital protectors in the AIC Flexible Investors sector, such as Capital Gearing Trust (CGT ) which stands on a 2.7% premium, and Personal Assets (PNL ), which stands just 0.9% above NAV.
This higher rating partly reflects investor demand for a trust that boasts to have participated in 74% of rising markets but only 39% of market declines since its launch in 1988. Over the past five years it has delivered a 74.1% total shareholder return, just above the MSCI World index return of 73.8%
https://www.theaic.co.uk/aic/news/citywire-news/lord-rothschild-uk-faces-worst-political-crisis-since-suez