UKMar 22 2017

Invesco's Barnett shifts away from international earners

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Invesco's Barnett shifts away from international earners

Invesco Perpetual's Mark Barnett has begun to move away from international earners after casting doubt on valuations in the space.

The manager of the Invesco Income and High Income funds predicted currency effects will not deliver a repeat of 2016's blanket upward trend for UK equities this year.

As a result, he said he was now diverting exposure away from some of the FTSE's larger names towards more domestic stocks.

"I am buying into domestic businesses where the ratings are at odds with reality. The market has taken a pessimistic view on certain sectors and that’s where I see opportunities," he said.

Sterling fell more than 15 per cent against the US dollar last year, giving a helping hand to mega-cap stocks which report in pounds but earn much of their revenue in dollars. Overseas earnings in total account for some 70 per cent of all revenues for FTSE 100 companies.

Mr Barnett is not the only manager who believes international earners' subsequent share prices rises are overdone. Columbia Threadneedle's Chris Kinder went one step further at the end of last year and sought to short stocks with earnings derived overseas.

While the more domestic-focused FTSE 250 index regained its momentum relatively quickly following sterling's slide on June 24, it still trails its FTSE 100 peer by around 10 percentage points over a 12-month view, with the large-cap index having returned 25 per cent over this period.

Invesco UK equity manager Martin Walker, a colleague of Mr Barnett, said: "The sterling move has been overdone. It would take a big move of relative UK inflation versus the US to push the purchasing power parity (PPP) level down to the current [exchange rate]."

Though they cautioned against viewing the figure in isolation, Invesco Perpetual's UK equities team said PPP suggests the pound has a fair value of $1.6 against the dollar, compared with its current level of $1.24.

Mr Barnett said the gains enjoyed by UK shares in the previous 12 months would be "difficult to replicate" for the forthcoming year, adding that earnings were unlikely to be revised upwards to such an extent.

The manager's £11.2bn High Income and £5.6bn Income strategies have both underperformed UK indices over this period; delivering 11.6 and 10.2 per cent over 12 months, respectively, compared with a 22.6 per cent return for the FTSE All-Share.

He added: "Macro influence has been significant. Is it likely to continue? At a sector level, maybe."

This, Mr Barnett said, made it difficult to call whether investors were now witnessing a "stockpicker's market", as some have suggested.

"It has been very sector driven and sector influences won’t go away. But within the sector there might be more differentiation [between companies]. So we might see less correlation but it is a difficult one to call," he added.

One stock recently removed by Mr Barnett recently was HSBC. However, the manager said this specific move was more to do with profit taking than its international earnings base.

"Shares were at a 30 per cent discount to tangible book value [when purchased] and they are now a 20 per cent premium. A large part of HSBC's profit recovery is now reflected in the share price," he said.

Financials continue to represent the largest sector exposure in Mr Barnett's portfolios. However, he said this remained a stock-specific issue rather than being due to bullish sentiment on the sector.