The Diverse Income Trust – Outlook for 2022

Gervais Williams

The Diverse Income Trust Plc

To date, ongoing stock market appreciation has been driven by a mix of premium global growth, which has been principally driven by the rapid growth of the Chinese economy and the appreciation of asset valuations, which has been driven by declining long-dated bond yields. When stock markets rapidly appreciate, often the best performing stocks are those with the greatest volatility. Typically, these high-Beta stocks as they are known, are either growing faster than others, or those with geared upside potential due to major debt.

Going forward for 2022, we believe the current slowdown in the Chinese economy will prove to be structural in nature. Just as happened in Japan in 1989, China’s giant debt burden combined with its aging demographics will lead to a sudden cessation of its growth trajectory, in our opinion. Alongside, after the pandemic stimulus, long-dated bond yields are now close to zero, so they have very little scope for any further appreciation in asset valuations either. At some point, the favourable valuation trend could even start to reverse.

During 2022, we anticipate that these challenges will become more apparent, which could initiate a long period of high-Beta underperformance. At a time of rising wage pressures and borrowing costs, companies with negative cashflow that are reliant on the stock market for funding, or those that turn out to be over-levered, tend to be particularly vulnerable.

Meanwhile, companies that have the potential to generate cash surpluses each year, such as equity income stocks have a natural advantage during more unsettled periods. Their surplus cash can be used to acquire over-levered, but otherwise viable, businesses from the receiver, so as things get worse, sometimes their ability to generate plentiful cash actually improves, contrary to the general trend.

The US stock market is a good example of a stock market dominated by high-Beta stocks, and the equity-income dominated UK stock market is a good example of low-Beta one. As the multi-decade trends evolve from favouring high-Beta stocks, to low-Beta stocks, we anticipate that the UK stock market will cease underperforming the US indices and reverse the trend over the next couple of decades – as happened previously. We believe the Diverse Income Trust is well placed if the improving UK trend were to occur.

Performance of Numis 1000 vs Numis Smaller Companies Index1 vs FTSE All-Share Index 1955-1988

Source: Numis Smaller Companies Index Q3 Review 2012. 1Formerly RBS Hoare Govett Smaller Companies Index.

The performance information presented in this article relates to the past. Past performance is not a reliable indicator of future returns.

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Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Investment in smaller companies is typically higher risk than investment in larger companies. Shares in smaller companies can experience greater levels of volatility.

Future forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this fund insight, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this fund insight.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Source: FTSE International Limited (“FTSE”) © FTSE 2022. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

A free, English language copy of the trust’s full Prospectus, the Key Information Document and Pre-investment Disclosure Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

005358/200122

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The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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