Those who, like me, were hoping that the Conservative Party conference this week would give some genuine clues to government policy on anything financial, let alone Brexit, were disappointed. There were a few broad brush strokes but no detail.
We were told that Brexit would happen in March 2019, which we were already assuming anyway. Prime Minister Theresa May will need to invoke article 50 to start the break with the European Union early next year or charges that she is prevaricating will start to stick.
It is possible that Parliament will attempt to block the process but that will only delay, not derail Brexit. May will simply call a general election and win handsomely on a manifesto with Brexit written large at the top. She will pick up two million votes that went to UKIP last time while the opposition vote will be badly split.
Investors must therefore work on the basis that Brexit means Brexit even if the details are missing. That does mean a period of prolonged uncertainty but remember that uncertainty produces buying and selling opportunities as stock markets swing wildly.
This week the FTSE 100 pushed up against its previous high while the FTSE 250 index did break new ground. This has a certain irony, since the big international companies in the 100 index are supposed to be less affected by the threat of Brexit and are already benefiting from overseas earnings translating into more pounds following the slump in sterling.
Pessimists have been quick to point out that while the indices are higher than they were before the referendum, if you take into account the fall in the value of sterling they are actually lower. That completely misses the point. London-quoted shares have provided an excellent hedge against the falling pound for anyone who earns and saves in pounds.
It is perfectly reasonable to take the view that shares are now fully valued given all the global economic uncertainties. I am among those who feel this concern. I will therefore be hoping that shares fall back quite sharply soon. I now have some more cash to invest – thanks to the dividends I have collected since the referendum – and will look for such an opportunity.
Sin Stocks Climb Higher
I’m not an ethical investor but I have found myself unable to countenance buying shares in arms manufacturers. It’s my loss.
Each time I look at BAE Systems (BA.) I feel tempted to cross the line because it looks a great investment. Unlike me, BAE has no qualms about selling fighter planes and much more to Saudi Arabia to supplement orders that are coming through from the UK and US governments.
This week BAE confirmed that earnings per share this year would be 5-10% higher than in 2015. Because orders tend to be in billions rather than millions of pounds, there is good visibility of earnings stretching over several years.
The shares offer a yield of just under 4% and the price/earnings ratio is an undemanding 13. I would buy if I wasn’t so squeamish.
Consumer Stocks Bring Home Discomforts
While we can’t possibly live without guns and bombs, it seems we can manage without new curtains. Another company I have been tempted to invest in on several occasions, and one that has absolutely no ethical barriers, is homewares group Dunelm (DNLM).
I was disappointed, therefore to see a downbeat trading statement covering the 13 weeks to October 1, Dunelm’s first quarter. Sales were down 1.8% on the same period last year, with warm weather blamed for keeping people out of the stores. I never like to hear weather being blamed for a fall in sales.
The saving grace at Dunelm is that online sales continue to grow strongly but even so the rate of growth has slowed since the previous first quarter.
With retailers likely to take the brunt of any downturn in consumer spending as we start the Brexit negotiations, I’m not tempted at the moment. I’ll take another look in three months’ time, and I wish Dunelm well in the meantime.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice.
