Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall, and I'm joined today by Derek Stuart from Artemis to talk about Brexit.
Hello, Derek.
Derek Stuart: Good morning. How are you?
Wall: I am very well. Thank you. How are you?
Stuart: Very well. Thank you.
Wall: I thought we could start by recapping what effect Brexit has had on markets, because it has had quite an impact?
Stuart: Yeah. The obvious effect it had on day one was the currency. And, again, the great thing about the U.K. stock markets and the U.K. economy is we are trading nation and 60% – over 60% of the earnings for the FTSE 100 come from overseas. So, you have this amazing effect of sterling falling 15% pretty quickly and effectively reevaluating some of the earnings for a large chunk of the market.
So, the market having jumped – having collapsed quite quickly, then realize the sterling effect and really quite strongly. So, you had this discrepancy from the overseas earners on the domestic earners, but you actually – since then you've seen an economy hold up relatively well. And indeed last week at the budget, the GDP figures revised up again; and we see the domestic economy is actually doing okay at the moment.
Wall: For, investors it's quite confusing news, because we're often hearing from fund managers that it's all about stock picking. The macroeconomics has no impact on markets, and actually you should focus on fundamentals. But, clearly, here we have an example of where macroeconomics have had an impact on markets. So how do we navigate that going forward?
Stuart: I mean, it's very difficult for any company, any economy to be immune from the macroeconomic environment. And that's a fundamental issue and it's something we could be aware of. But I think there is enough of noise that’s out there. And in terms of people's ability to forecast the macroeconomic environment, that’s very difficult.
I mean, again, you saw that in the aftermath of Brexit, people slashing their GDP forecast for the U.K. for 2016 and 2017. I mean, in fact, there were some analysts in the city who thought we'd have a recession in the U.K. in the fourth quarter of 2016. Now, that's not happened and it just demonstrates to us how difficult it is to forecast the macro.
Now, we look at the companies, we get our macro views on inflation, on growth, on demand from what the companies are telling us, because they are closest to the curve, the mineshaft. They are closest to the customer. And most of these customers are saying – all of these clients are saying exactly that same thing to us. They're saying, you know, we don't always have Brexit, but at the moment we're getting on with the day job, I am actually doing okay at the moment.
Wall: So how do you invest in a market like that? Is it about particular sectors that may do well out of Brexit? Or is it sort of back to basics?
Stuart: I think we have to recognise there are some sector volatility when you have macro moves that we've had, whether it's currency or commodity moves or interest rate moves. But for us, it's very much about identifying the single stocks, the individual companies that can do pretty well in most situations.
So, our style of management is to identify companies that – yeah, the macro is an issue, but there is so much going on internally, there is so much they can do in their own markets, there is so much self-help they can bring that actually no matter what the macro, they can at least advance forward.
Let's bear in mind that we've had a funny macro situation for years. We've had the situation of the great financial crisis. We've had the problems of QE. We've had the problems in Greece, China, the euro, elections, politics, it gets thrown at us. We have got more to come. So actually focusing on individual companies becomes even more important.
Wall: Do you have any individual stocks that you think at the moment the time is right?
Stuart: There is a variety of stocks that got treated very harshly post-Brexit. There's a variety of stocks that actually had problems last year. I mean, we've got positions in Tesco (TSCO), which has had well-publicised problems both from discounters and from historic issues over expansion.
We have got company like Cobham (COB) in the aerospace sector, which again has a number of profits warnings. Again, aerospace is a growth sector; defense, we see the spending is coming through. So, again, lot of self-help to come through in this company.
Bovis Homes (BVS) is another company, where you know it's a housebuilder that's had problems, and you could buy the shares not long ago at net asset value. There is a selection of companies out there and for us there is always a company that's having problems. I think, get the right management teams behind these companies, then we can make some decent money.
Wall: Derek, thank you very much.
Stuart: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
