In an earlier note this year we argued that full employment appears to be taking precedence over price stability: a higher tolerance for inflation might be justified by our society today – in the name of reducing unemployment. Underneath this policy shift and catalysed by the current crisis is a growing awareness of inequality – and the appetite to reduce it. The G7 agreement for a global minimum corporate tax rate is a new marker suggesting that burden sharing is set to change. The rich, whether individual or corporate, are likely to have to pay more to help the low-paid in the coming years. Within equities, these shifts may have important implications – likely supporting low priced assets whose value is based on today’s cashflows – and hindering those expensive assets whose valuation is based on the long-dated cashflows of tomorrow.
Major societal upheaval has often laid the ground for increased government intervention and expanded support. After World War I, the national political mood allowed Lloyd George to introduce the beginnings of government welfare, with legislation expanding the provision of education, healthcare and housing. During World War 2, the Beveridge Report argued for another leap forward, where the state should establish a support system “from cradle to grave”. Clement Attlee, incorporating the Beveridge Report in his manifesto, won by a landslide in 1945.
Whilst the current virus crisis is not war, it appears similarly inequitable. Certain families and businesses have been untouched from a health and financial perspective, whilst others have faced tragedy and major upheaval. As we all know, certain large corporations have flourished. The starkness of these differing fortunes and the inequality of outcomes are having a galvanizing effect and driving policy. Tax havens are an obvious target and are facing a hostile period ahead. So too are large corporations or financial structures using excessive engineering to avoid tax. Significant wealth, one way or the other, appears set to face higher taxation.
As equity investors, we view taxes in a similar way to interest rates: the longer the duration of the asset and the higher the valuation, the more sensitive to tax changes. The prospect and enactment of Donald Trump’s sweeping corporate tax cut helped ignite the rally in US equities, but it benefitted the Nasdaq the most. The largest multiple expansion came from those securities that were already the most expensive. Now we are set to see this work in reverse. Higher interest rates and higher taxes ought to have the greatest impact on the most expensive securities. The phenomenon may have started already. Value investors have a greater protection from this risk.
If history is a guide, the movement to promote equality and to raise taxes on the wealthy has the potential to last. At Lightman, we are invested on the basis of higher taxes and higher government spending for the foreseeable future. A larger share of government spending in the economy has historically been associated with higher inflation and as a consequence, higher nominal GDP growth.
We invest in a number of companies at low valuations that are positively correlated to higher nominal GDP growth. We own positions in leading companies in Materials, Financials, Industrials and Autos that are experiencing strong earnings growth. Many of these companies are supported by the investment cycle driven by the clean energy transition. Government legislation and spending plans are aligned directly or indirectly with the majority of our positions. Our companies also have solid balance sheets. 10% of the LF Lightman European Fund’s holdings have a net cash position and over 50% have less than 1x net debt to ebitda. The valuation of our companies are grounded in the reality of operational performance today, with large net assets and solid cashflows.
Value investing continues to recover. Expensive securities have started to underperform. The economic, political and social environment suggest value’s renaissance is likely to last. We remain optimistic about the absolute and relative return potential of the LF Lightman European Fund in the coming years.
Lightman – May 2021
This document is owned by Lightman Investment Management Limited (“Lightman”, “we”, “us”). Lightman Investment Management Limited (FRN: 827120) is authorised and regulated by the Financial Conduct Authority (“FCA”) as a UK MiFID portfolio manager eligible to deal with professional clients and eligible counterparties in the UK. Lightman is registered with Companies House in England and Wales under the registration number 11647387, having its registered office at c/o Buzzacott LLP, 130 Wood Street, London, United Kingdom, EC2V 6DL.
This document is intended for ‘Eligible Counterparties’ and ‘Professional’ clients only, as described under the UK Financial Services and Markets Act 2000 (“FSMA”) (and any amendments to it). This document is not intended for ‘Retail’ clients and Lightman does not have permission to provide investment services to retail clients. Any marketing document is only intended for ‘Eligible Counterparties’ and ‘Professional’ clients in the UK, unless it is being used for purposes other than marketing, such as regulations and compliance etc.
Collective Investment Scheme(s):
The collective investment scheme(s) – LF Lightman Investment Funds (PRN: 838695) (“UK OEIC”, “UK umbrella”), and LF Lightman European Fund (PRN: 838696) (“sub-fund”, “UK product”) referenced in this document are regulated collective scheme(s), authorised and regulated by the FCA. In accordance with Section 238 of FSMA, such schemes can be marketed to the UK general public. Lightman, however, does not intend to receive subscription or redemption orders from retail clients and accordingly such retail clients should either contact their investment adviser or the Management Company Link Fund Solutions (“Link”) in relation to any fund documents.
The collective investment scheme(s) – Elevation Fund SICAV (Code: O00012482) (“Lux SICAV”, “Lux umbrella”), and Lightman European Equities Fund (Code: O00012482_00000002) (“sub-fund”, “Lux product”) referenced in this document are regulated undertakings for collective investments in transferrable securities (UCITS), authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg. In accordance with regulatory approvals obtained under the requirements of the Law of 17 December 2010 relating to undertakings for collective investment, the schemes can be marketed to the public in Luxembourg and Norway. Lightman, however, does not intend to receive subscription or redemption orders from any client types for the Lux product and accordingly such client should either contact their investment advisor or the Management Company LINK FUND SOLUTIONS (LUXEMBOURG) S.A. (“Link Lux”) in relation to any fund documents.
Accuracy and correctness of information:
Lightman takes all reasonable steps to ensure the accuracy and completeness of its documents and its contents; we however request all recipients to contact us directly for the latest information and documents and issued documents may not be fully updated. We cannot accept any liability arising from loss or damage from the use of this document.
Wherever the document refers to a third party such as Link, Northern Trust etc., we cannot accept any responsibility for the availability of their services or the accuracy and correctness of their content. We urge users to contact the third party for any query related to their services.
Important information for non-UK or non-EEA persons (Including US persons):
This document is not intended for any person outside of the UK or the European Economic Area (EEA). Lightman or any of the funds referenced on this document are not approved for marketing outside of the UK or the EEA. All non-UK and non-EEA persons must consult their domestic lawyers in relation to services or products offered by Lightman.
Risk warning to all investors:
The value of investments in any financial assets may fall as well as rise. Investors may not get back the amount they originally invested. Past performance is not an indicator of future performance. Potential investors should not use this document as the basis of an investment decision. Decisions to invest in any fund should be taken only on the basis of information available in the latest fund documents. Potential investors should carefully consider the risks described in those documents and, if required, consult a financial adviser before deciding to invest.
Offer, advice, or recommendation:
No information or document on this document is intended to act as an offer, investment advice or recommendation to buy or sell a product or to engage in investment services or activities. You must consult your investment adviser or a lawyer before engaging in any investment service or product.
The content on this document cannot be distributed or reproduced without our consent.