All this week, Morningstar.co.uk will be bringing you a Guide to Investment Ideas for 2017; stock picks, market reactions and political forecasts from the investment professionals.
Emma Wall: Hello and welcome to the Morningstar Video "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Simon Brazier, Manager of the Investec U.K. Alpha Fund.
Hi Simon.
Simon Brazier: Good morning.
Wall: So, 2016 has rather made a mockery of predictions and pollsters. However, I am going to ask you for your 2017 U.K. equity outlook please?
Brazier: Well, actually we've been quite consistent despite all the machinations of the markets and politics, which is, we still think we live in a low growth world. We still think there is plenty of external risks out there, whether it’s the exiting of QE, whether it's going to European elections.
And we think that in that environment one has to stick to ones knitting and find good quality companies. But what that means this year, I think will be more volatility. I'd struggle to see the market pushing a long way ahead because of valuations, and unfortunately a lot of uncertainty.
Wall: Now 2016 was a good year for U.K. equities for the most part because of sterling. How much does that currency play in 2017 outlooks?
Brazier: Well, we've seen what sterling can do to ones, portfolio particularly because the U.K. market has quite a lot of overseas exposure, and so I think it will be key again. The reality is, is our view will be that sterling over time will strengthen as we get more certainty around the U.K.'s position in the world particularly relative to Brexit.
Clearly also the sterling dollar rate which is very important for some of the biggest companies that report in dollars will also depend on what actually the Trump administration looks like. So, there is some key uncertainty again in that area, but over time our view would be from these levels, over time you should see certainty come into the market and sterling appreciate.
Wall: Well, there were some key dates in 2016 which proved inflection point for the market. Do we have any of those this year looking forward?
Brazier: In terms of actual dates, I mean as I said Trump's arrival in the U.S. is absolutely seminal for what's going to happen in global economics and politics. We don’t really know actually how that’s going to work out yet. So, we'll be watching that very, very closely and of course there is a set of European elections which I think will set the tenure for the European project for some years to come. Will electorates really in Europe be prepared to take that next step to challenge their leaderships to say we don’t like what you've put on the table, which would be to some the end of the Eurozone, the EU as it is, but we will have to see.
Wall: 2016 has been a year of themes as well as a year of currency and those themes were the fact that miners finally began to do very well, which they hadn’t done in years previously. Going into 2017 do you expect that to continue or will we see a reversion?
Brazier: I mean there was a clear style shift halfway through this year and it was those companies that, deemed as the value end of the market, these are the companies whose valuations are trading below their long run averages which was mining, it was oil and it was banks. Some people think like ourselves that they have challenges in those sectors in terms of the individual companies or the sectors within there.
But you saw that mean reversion come through. Can it continue through? Yes, it can. Having said that when mining and oil are both up over 50%. The upside is more limited, interestingly to me actually the one area of the market that has now fallen down to below its 10-year valuation average is domestic consumer cyclicals. I wouldn’t say that all of them are attractive, but for the first time we are seeing companies in that area where valuations are maybe pricing in some of the uncertainty ahead.
Wall: Simon thank you very much.
Brazier: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
