In the years running up to the elections, the massive weight of political uncertainty in the UK led to weak business sentiment, which contributed negatively to GDP growth and has meant that a lot of investors have been reluctant to put their money into UK equities.
But that could all the changing.
Sheridan Admans, investment manager at the TC Share Centre Multi Manager Funds, says: “With more clarity added after the 12th December election the Conservative win means we are looking to tilt our UK exposure across the capitalisation spectrum to a greater focus on mid and small caps once again.
Investing in the UK
“We continue to see increasing value in UK domestically focused companies, which will likely see us add to the region over the course of the year.”
According to Alastair Mundy, portfolio manager at Investec UK Special Situations Fund and Temple Bar Investment Trust, there are several ways in which Brexit will favour UK domestic earners over international earners:
- Sterling could strengthen
- The UK is due a budget, which could see voters thanked for making the ‘right’ decision, and in which the government could commit to higher fiscal expenditure
- Many consumers and companies have probably been delaying consumption and investment, so there could be a rebound in activity
- Overseas bidders will be more confident about the economic outlook and may seek to buy up cheap UK assets
- International equity buyers, who have probably been avoiding UK equities and particularly domestic earners, may be tempted (or forced) back into the market.
Jon Stopford, portfolio manager at Investec Diversified Income Fund adds: “We expect some further recovery in sterling and UK domestic stocks on reduced uncertainty and the removal of the tail risk of market-unfriendly policies, although a fair amount of this is already in the price, given the polling in advance of the election.”
According to a recent Association of Investment Companies (AIC) fund manager poll, UK equities has been tipped as a top earner for 2020.
The study found that the UK is the region most investment company managers believe will produce the best stock market return in 2020 according to the annual poll.
The poll was carried out with AIC member investment company managers between 13 November and 2 December 2019.
Despite the UK’s challenges over Brexit and a General Election, a third of respondents (33 per cent) feel the country has the best prospects for the coming year.
Despite the survey being done prior to the results of the election, it is thought the sentiment from fund managers will not have altered that much following the vote.
An interesting theme in 2019 has been a substantial pick-up in M&A interest within the portfolio Laura Foll, Lowland Investment CompanyLaura Foll, co-manager of Lowland Investment Company and Henderson Opportunities Trust, says: “Since the EU referendum result, the UK equity market has been an easy one to ignore.
“This is backed up by fund manager surveys where the UK languishes at the bottom; in other words is often the largest ‘underweight’ position globally.
"An interesting theme in 2019 has been a substantial pick-up in M&A interest within the portfolio. This is a trend we expect to accelerate on any resolution [on Brexit].”
Although the Conservative Party win has provided some economic clarity, it is a clarity for the short-term, as it is likely the markets have already shifted their focus to look at what happens next after the UK’s expected exit from the EU in January.
Matthew Cady, investment strategist at Brooks Macdonald says, with only eleven months left to negotiate the UK-EU future trading relationship, markets will worry about the risks of no-deal with the EU, and risk of the UK crashing out on World Trade Organisation (WTO) terms, given Boris Johnson’s current refusal to consider any extension to this transition period.
Mr Cady adds: “In seeking a radically new relationship with the EU, the UK is likely to need more time, and with more extensions and delays, comes the risk of continued uncertainty.
“None of this is helpful in the context of the UK economy having just suffered its worst three-month performance for more than a decade.”
Kevin Boscher, Ravenscroft’s chief investment officer believes the market will likely benefit from increased M&A activity.
UK equities
Mr Boscher adds: “If sterling continues to strengthen, as anticipated, this would be expected to negatively impact the earnings outlook for export-oriented UK equities.
"This is especially true for FTSE 100 companies, given the very high weighting to non-sterling sales and revenues.
“In addition, and similarly to the economic outlook, UK equities will continue to be impacted by the challenging environment for global equities.
"However, on a longer-term basis, we believe that UK equities, and domestically-focussed mid and small cap companies, in particular, are an attractive investment opportunity and could be in the early stages of a period of significant outperformance.”
Despite this, investment professionals still see opportunities in UK equities.
Mr Admans says: “Unsurprisingly Brexit rhetoric will persist. From an investment perspective, sentiment is likely to remain challenged.”
Richard Staveley, managing director of strategic public equity at Gresham House and manager of the Gresham House Strategic investment trust, adds: “There is clearly pent up investment demand and corporate decision making, which should be unlocked by the result.
“UK equities remain excellent value when compared to many other asset classes, cheap compared to history and other markets – particularly the US.
"Small company shares are discounted further, and value situations even more. The investment outlook has rarely been more exciting.”
Further afield in Europe, sentiment has been particularly negative due to Brexit and the trade war’s hit to manufacturing and exports, which contribute significantly to Eurozone GDP.
But some forecasts are calling for a turn in industrial production in 2020, especially if trade talks progress. Also, in November, the ECB restarted its bond-buying programme.
In a report by Janus Henderson, the investment firm says: “This liquidity should help bolster the economy and provide asset price stability, potentially improving investor sentiment toward Europe.”
US equities
In the US, Donald Trump’s quest for a second term, could push him to do everything in his power to both avoid recession and keep the stock market climbing higher, according to Darius McDermott, managing director of Chelsea Financial Services.
This means, there could be some ‘first phase’ resolutions in terms of trade wars, which will be positive for both the US and Asia including Japan.
Mr McDermott adds: “The Federal Reserve has halted its interest rate rises, and many other central banks, including the European one with new head Christine Lagarde, are looking to undertake more fiscal stimulus, which should prove positive for equities.
“In the UK we’ve already seen a relief rally on the back of the general election.
"If global fund managers believe that the outlook for the UK is now more positive, their reallocation to UK equities – even back to a neutral positioning – should gently push the stock market higher.”
For Mr Admans, the US has given him the most cause for concern on a valuation basis, albeit at a sector level he adds that he can see some opportunities.
Mr Admans says: “On all measures we consider US equities as expensive relative to global peers and history.
"In recent years we have seen US valuations supported by buybacks, but signs of stress are now starting to appear and forward looking CEO confidence surveys indicate much less faith ahead.
“While global economic growth slows, the US economy remains fairly robust.
"Using our traffic light model that looks at three factors of region’s economic situation, the US economy is now starting to flash between amber and red with regards to its fundamentals, technical and macro.
"Until recently it was only giving us a red signal on the market fundamentals.
“This is leading to the view the US economy may be slowing faster than the market thinks, despite this we have found some pockets of value.”
