Managers Gervais Williams and Martin Turner expect income stocks to emerge as market leaders due to their consistent cash returns to shareholders amid ongoing geopolitical shifts and heightened asset price volatility. They see the UK as a particularly attractive region, citing prolonged capital outflows following the Brexit referendum that have led to undervaluation in domestic equities.
According to the managers, UK small-cap equity income stocks are currently trading at notably low valuations. They believe these stocks offer opportunities for both income and capital growth, especially within the current market environment.
The Diverse Income Trust (LON:DIVI), managed by Williams and Turner, is positioned to benefit from these dynamics. The trust employs a strategy that invests across the market capitalisation spectrum, aiming to deliver both income and capital growth. Since its launch in April 2011, it has delivered uninterrupted annual dividend increases. It has also outperformed all but one of its 17 peers in the AIC UK Equity Income sector, as well as its comparator indices, over that period.
Williams said asset markets are becoming increasingly narrow, with strong performers and unprofitable US technology stocks falling away. He noted that bond yields are declining significantly, which he interprets as a sign that markets are becoming more concerned about deflation than inflation. While the ongoing strength in major US technology stocks, often referred to as the ‘Magnificent Seven’, continues to support market performance, he described the current market breadth as “incredibly thin”. He acknowledged that narrow markets can still rise, sometimes rapidly, but suggested that current conditions may indicate a late-cycle environment.
The managers argue that the income-focused approach of the trust is well-suited to a period of economic uncertainty, offering more predictable shareholder returns and potential upside from valuation recovery.
