Yahoo Finance Questor: Cash in on Britain’s economic recovery with this wealth manager
The “green shoots” of a UK economic recovery have finally made their long-awaited appearance.
Although there is still a very long road ahead, with the full impact of previous interest rate rises yet to be felt due to the existence of time lags, the economy’s growth rate of 0.6pc in the first quarter of the year is highly encouraging.
It means that the UK economy is no longer in recession. And with inflation having fallen from 8.7pc to 2.3pc in the past year, the prospect of interest rate cuts is firmly on the near-term horizon.
They should have a positive impact on GDP growth, once time lags have passed, and provide improved operating conditions for a wide range of UK-focused companies.
For example, wealth management firm Brooks Macdonald’s financial performance is highly dependent on the fees it generates from funds under management that ebb and flow with changes in asset prices.
It stands to benefit from a stronger economy that prompts improved trading conditions across a wide range of industries. They should lead to a rising stock market and greater fee income for the firm.
A looser monetary policy that positively catalyses the stock market is also likely to prompt greater risk-taking among investors. This should encourage them to buy, rather than sell, risky assets and further boost the firm’s funds under management and fee income.
Indeed, it could be argued that Brooks Macdonald is akin to a geared play on the stock market. This partly explains why its share price performance has been disappointing since the company was added to our inheritance tax (IHT) portfolio in August 2018.
Since then, it has produced a 1pc capital loss as the UK stock market has come under sustained pressure amid a period of rapid monetary policy tightening that has prompted a material slowdown in the rate of GDP growth.
However, it has significantly outperformed the FTSE AIM All-Share index, which is down 27pc over the same period. Our holding has also paid dividends amounting to 19pc of our notional purchase price so that its total return stands at 18pc.
The company’s latest quarterly update showed that funds under management rose by 2pc. This, though, was due to the impact of positive investment performance that boosted funds under management by 3.7pc, with net outflows of 1.7pc being recorded.
In Questor’s view, both measures are likely to improve in the long run as interest rates fall, the economy’s growth rate gathers pace and investor sentiment becomes more bullish.
Brooks Macdonald also reported in its quarterly update that it continues to realise cost savings prompted by organisational changes. It remains on track to meet financial guidance for the full year, with the market consensus forecasting a rather modest 4pc rise in earnings.
Trading on a price-to-earnings ratio of 13.1, the stock offers fair value for money on a long-term view. Alongside a dividend yield of 3.8pc, its total return prospects remain relatively upbeat.
Certainly, elevated political risk could prompt heightened share price volatility in the short run.
The stock also requires further patience as the impact of interest rate cuts on the economy’s performance, as well as on investor sentiment, take time to become evident.
But with the company well placed to become a beneficiary of this process, it deserves more time to deliver on its potential.
Questor says: hold
Ticker: BRK
Share price: £19.80
Update: Inspecs
Another of our IHT portfolio holdings, Inspecs, recently released full-year results.
They showed that the eyewear designer and manufacturer produced a slight increase in revenue versus the prior year, with its £203m of annual sales being a record.
It generated pre-tax profits of £0.2m, versus a £7.7m pre-tax loss in the previous year, and was able to reduce net debt by around 11pc so that its net debt-to-equity ratio now stands at roughly 40pc.
Since being added to our IHT portfolio in July 2022, the company’s shares have fallen by 71pc. This represents a 63 percentage point underperformance of the FTSE AIM All-Share index over the same period, which is thoroughly disappointing.
Given that the prospects for consumer-related stocks are likely to strengthen as interest rates fall and the economy’s performance improves, not only in the UK but elsewhere, the stock will remain a holding in our portfolio.
The company’s price-to-book ratio of around 0.7 highlights its low market valuation and scope for a recovery should its financial performance continue to improve.
Questor says: hold
Ticker: SPEC
Share price at close: 68.5p
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