Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by William Meadon, Manager of the JPMorgan Claverhouse Trust.
Hello.
William Meadon: Hello.
Wall: So, U.K. equities is your bag, but it's not everybody's at the moment. And foreign investors are not very keen on U.K. equities. Why is this and are their fears founded or unfounded?
Meadon: You're right Emma that U.K. equities are pretty unloved at the moment. And to some extent, that's understandable. The politics has been very uncertain. The snap election that was called by Theresa May where the result went a way that not many expected. Clearly, Brexit is overhanging, but those skies will clear in some form in the next 12 or so months.
But I think the mistake investors are making is – if they are neglecting U.K. stock market completely is that the U.K. stock market is not the U.K. economy. If you look at, for example, the top 100 companies, the FTSE 100 companies, roughly 70% of their earnings come from overseas. So, effectively, if you buy the FTSE, you are buying world equities. And now, as you say, you are buying it on a knock-down rating.
I mean, prospective yield on U.K. equities is more than 4%, which is the highest of any developed stock market around the world. So, there is some bad news or some uncertainty around in terms of politics, but that is, I think, more than a reflection of the price, and we can go on to talk about, the underlying fundamentals, I think, are still reasonably good for U.K. plc.
Wall: Because the market, the FTSE 100, did fall significantly from the beginning of the year down to sort of, I think, the low was March the 27th. But it has come up again since then. So, our people sort of are being overly pessimistic and just taking that snapshot and failing to recognize that actually, as you say, the fundamentals are strong?
Meadon: Yes, you are right. But it isn't just the U.K. stock market that's been volatile this year. The world equities sold off for a number of reasons at the start of the year, not least of which there were some very substantial profits to take from the year before. But U.K. equities did bounce very strongly in April. I think the market was up roughly 6%. And again, it was one of the best-performing markets if not the best-performing market in that month.
So, there's a lot of volatility. But I think as professional and indeed, private investors we also try and look through that and take a view of whether equities, in this case, U.K. equities are good value on a medium-term view and I think they are.
That's why my investment trust, Claverhouse Investment Trust, is geared and that the U.K. stock market now is at roughly the level it was at the start of the year. But in the meantime, you are getting this very good yield along the way. So, you are being paid to wait.
Wall: And what is it about the fundamentals that you continue to think and the valuation that you continue to think is compelling?
Meadon: Well, it varies from company to company. But on average, if you look at the reporting season that's taking place at the moment, companies on average are beating analyst expectations. So, current trading – it varies from company to company – is going generally pretty well. Balance sheets are in a pretty good shape. Average debt has come down for U.K. plc each of the last three years.
You are getting a very good dividend along the way as well from a lot of companies, some of them paying special dividends. So, I think, that combination makes U.K. equities quite attractive in these circumstances, but investors have to learn with accepting some volatility which they didn't have the year before. It was a very easy ride in 2017.
Wall: And finally, how much does currency play into this? Because a lot of the returns in 2017 from U.K. equities were driven by lower sterling ever since the Brexit vote, I believe. Sterling has started to come up a bit. Is that going to impact the FTSE too much?
Meadon: The currency was quite strong – sterling currency was quite strong at the start of the year. It was partly a function of dollar weakness. But in fact, the last four or five weeks sterling has started to weaken again. So, it's now sort of $1.36 against the dollar having been $1.43, $1.44 and look what happened; when the currency weakened, the stock market went up because of the translation of those overseas earnings and some dividends paid in dollars.
So, the currency is important, but I don't think our investment stance should be predicated on where the currency is going. We don't in Claverhouse Investment Trust try and predict where sterling is going, although I do think at this level it's pretty competitive.
Wall: William, thank you very much.
Meadon: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
