“On Friday June 24 you did not feel like there were blue skies ahead,” says Indriatti van Hien, deputy manager of the Henderson Smaller Companies Investment Trust (HSL).
“The Government looked in disarray, Bank of England Governor Mark Carney remained bearish and markets had fallen dramatically.”
As a result, van Hien and the trust’s lead manager Neil Hermon took the decision to sell out of a number of economically sensitive stocks, a reaction that with hindsight has proved to be of mixed success. One of the less successful trades was SSP Group (SSPG), an operator of food and beverage outlets in travel locations across the UK, Europe, North America, Asia Pacific and the Middle East.
“We regret selling SPP Group,” admits Hermon. “It has since rallied 10%. But on the day airline groups Lufthansa and AIG had issued Brexit related warnings – and there had been a number of terror attacks in the preceding months.”
The team also sold half of their stock in Howdens (HWDN); concerned about the future spending power of the UK consumer. The stock fell from £5.10 the day of the referendum, to £3.41 on Friday June 24 when the result was announced. It is now £4.27 a share.
Hermon points to LSL Property Services (LSL) as a stock they were right to sell, reducing their position by £1.5 million. Riding high at £2.95 prior to the result, it then fell to £2.20 and has failed to make back the loss since.
Profiting from the Brexit Fall-out
Good quality companies were dragged down with the bad following the Brexit vote, creating plenty of buying opportunities. Hermon added to positions in wealth manager Brewin Dolphin (BRW), fund manager Jupiter (JUP) and housebuilders Crest Nicholson (CRST) and Balfour Beatty (BBY) – all of which have rallied considerably since the end of June. Since June 24, Brewin is up 28%, Jupiter up 27%, Crest has rallied 33% and Balfour has made considerable gains of 52%.
The team sees opportunities within the infrastructure space, which they expect to benefit from the new Chancellor’s Autumn Statement. “We see the Autumn Statement as a catalyst for markets,” says van Hien. “The Government is committed to spending, and it is not priced in to stocks yet as the details are unclear – we don’t know where the spend will be, or how much it will be.”
Concerns About Domestic Growth
Despite positive recent economic data, it is still early days for Britain – the Government has yet to trigger Article 50 and it will be years before we really know what the post-Brexit landscape will be.
Hermon admits that small and mid-sized companies are more sensitive to domestic economic concerns, but says there are plenty of stocks to choose from with in-built protection from a potential slowdown.
“We are looking at our holdings and we are aware which export to Europe. At the moment the lower sterling value has active as a shock absorber for those stocks but that may not always be the case,” he said. “We used to have 52% of our portfolio in pure UK stocks, now it is 48%. The exporters we own are global businesses, market leaders with revenues from the US and Japan such as Vitrex (VCT) and Renishaw (RSW) – these won’t be affected by Brexit.”
