Merchants trust has rotated into a range of energy and mining companies as rising inflation and interest rates bring an end to the era of “cheap money”.
Manager Simon Gergel told Investment Week that the 133-year-old trust has continued to top up its position in firms across the sector, arguing that the surge in commodity prices twinned with spiralling inflation had bolstered the outlook for these companies.
Shell, Scottish & Southern Energy, Drax Group and Rio Tinto take up some of the equity income trust’s largest positions, and at the end of April, 9.5% of the trust was invested in the energy sector.
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Despite pressures to divest away from fossil fuels, Gergel firmly believes divestment would be counterproductive and “will not achieve anything”.
“If you forced BP and Shell to sell their hydrocarbon assets, they will sell them to shareholders who do not care as much about these issues and are not under the same microscope as the big energy companies,” he said.
“If you want to drive the energy transition, you need the big energy companies to be at the front and centre of that. They have got the skills, infrastructure, people and balance sheet that are critical for transforming the economy.”
Gergel’s distrust of divestment stretches across other sectors, demonstrated by a range of ‘sin stocks’ in the trust’s top holdings, including British American Tobacco (4.8%), Imperial Brands (4.7%) and arms manufacturer BAE Systems (3.5%).
The end of ‘cheap money’
The move to higher inflation and interest rates may also mark the end of the “cheap money” that has been driving people to “higher growth, longer duration-type investments”, Gergel reasoned.
“We have seen a boom in cryptocurrencies and special purpose acquisition companies and all sorts of things which are quite unusual and symptomatic, perhaps, of a bit of excess,” he said.
“It feels like that period is gone now and I think there is going to be more of a rational assessment. I do not even see a big boom back in high growth companies that do not make any money again, for a while. I feel like that move has changed.”
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The manager added that one of the main factors adding to the possibility of longer-term higher inflation has to do with a new era of deglobalisation.
“Companies are bringing things back to the West and focusing on making sure that they have got inventory, just in case rather than just in time, and that is potentially adding inflation because the cost of labour is higher and the cost of products is likely to be higher,” he said.
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