The UK could be one of the best performing stock markets over the course of the next 12 months, but in the medium term investors are right to be cautious, according to Fidelity’s Bill McQuaker.
The FTSE 100 had its largest one-day drop since the EU referendum vote on Thursday, dropping 3.2% to a two-year low of 6,685 on concerns the ceasefire in US-China trade war was vulnerable.
The political pantomime in the House of Commons on Tuesday evening hasn’t helped UK stocks, either, with the FTSE 100 down more than 5% since the start of the week.
But, short-term volatility doesn’t worry McQuaker, manager of the Fidelity Multi-Asset Open range of funds. However, he does expect the mid-cap FTSE 250 to outperform its blue-chip counterpart.
McQuaker notes there are many positive factors that could drive a re-rating of UK stocks. The first of which being the fact that the UK is a defensive market with plenty of “big, boring sectors that hold up when bad stuff’s happening”.
Sterling Boost Positive for FTSE 250
UK equities have been unloved for a long time now, among both individual and institutional investors. The amount of cash that has been withdrawn from UK assets by global investors means there’s “not a lot of flighty money in the UK stock market” right now, says McQuaker.
“That’s actually quite a welcome thing,” he explains. “If there is going to be a deterioration in market conditions, people won’t be selling the UK because they’ve sold out of it already.”
McQuaker also thinks it’s likely we’re gearing up for a much softer Brexit than had been feared. While Prime Minister Theresa may’s deal is currently in the balance, the fund manager believes it will eventually be passed by parliament.
Even if it isn’t, though, he adds: “I think the will of parliament is to navigate away from crash out to something more palatable from the point of view of the economy”.
Should this turn out to be the case, there should be some short-term upside to sterling, which he also thinks is fairly priced. That would lead to an outperformance from the FTSE 250 relative to the FTSE 100, due to the latter’s higher dependence on US dollar denominated revenues.
Brexit Will Leave UK in "Limbo-land"
However, on a 10-year view, his reading of the Brexit outcome suggests a much gloomier picture for the UK. “When I look at the environment that I think we’re likely to face in the medium term, I’d say that’s where I get a bit more depressed, quite frankly.”
He describes his previous prediction of a softer Brexit as “remain watered down… and Brexit watered down”. He explains: “So, we’re not going to get the benefits of staying in the EU, and we’re not going to get the benefits of Brexit.”
McQuaker describes the “limbo-land” the UK will be left in as like “we’re leaving earth, we’re on our way to heaven but, unfortunately, we’ve got to live in purgatory for as far as the eye can see”.
From a global capital point of view, that is quite unappetising, he claims: “Who’s going to want to come and invest in a country that’s betwixt and between for the next 10 years?”
“I do worry that the solution that we seem to be facing is probably going to ameliorate some of the near-term risks but isn’t a positive environment for the medium term and that’s quite troubling.”
