The next (but not necessarily final) Brexit deadline is 31 October, and the UK remains in an uncomfortable stasis after three years of uncertainty. But it’s not all bad news: there are a number of bright spots to be found in the economy, and buying opportunities in the markets after Q4’s sell-off, say three UK specialists.
Melanie Baker, senior economist at Royal London, says the UK is likely in for bumpy ride. Her growth forecasts are in line with consensus at just under 1.5% for this year and slightly higher for 2020.
Part of the problem is that business confidence has been low and firms have been reluctant to invest, with four consecutive quarters of negative business investment pulling down growth. But Baker says that, while the UK economy contracted in December, it will probably look reasonable in the first quarter, despite the bumps under the surface. “Firms have been stock building and scrambling to prepare for Brexit which will have actually helped the economy this quarter but in the second quarter it will probably fall back again.
“We still can’t rule out the prospect of a no-deal Brexit, and that’s a big worry and uncertainty for the outlook,” she adds.
Confidence Picking Up
Richard Buxton is head of UK equities at Merian Global Investors and manages the two-star Morningstar rated Merian UK Equity fund and Silver-rated Merian UK Alpha fund. He says incorrect forecasts from the Bank of England governor (which earned Mark Carney the label “unreliable boyfriend”) and ongoing uncertainty have been “a handbrake on the economy”. Still, the manager is optimistic that when there is some clarity, growth will return. He points out that job creation has been surprisingly strong, while consumer confidence is picking up.
“We’ve seen extraordinary growth in the labour market. We have never had so many people employed since records began in 1971, yet there are still 800,000 job vacancies.” He argues that, despite stagnant business investment, there is still growth to be found among start-ups. “There is an entrepreneurial new business dynamic going on in the UK economy. Net new business formation is running at double-digit rates and has done for some years, which is fantastic.”
Although some sectors of the economy, such as autos, are slowing, more people are employed in growth sectors such as media, where self-employed entrepreneurship remains strong, he says. “The UK economy is in generally good shape and likely to improve, and valuations are cheap.”
UK is Most Hated Asset Class
The UK has become a global pariah among asset allocators since the EU referendum in 2016, says Andrew Jackson, manager of the three-star rated Miton UK Value Opportunities fund. “We are the most hated asset class,” he says. “But overseas investors who have been divesting UK equities have run out of UK equities to sell and are now thinking about reallocating to them, which is a good thing. There is the potential for UK equities to start being rehabilitated into the wider investment community.”
He says the “dramatic sell-off” in the fourth quarter of last year was a great buying opportunity. “There was a clear and present opportunity to buy shares – there weren’t many downgrades, so it was just [driven by] the fear of the downturn. There has since been a good recovery, with the market up 10 to 15%.”
Buxton agrees the market is now cheaper than its long-term averages, and says investors have yet to take full advantage. “What’s been interesting is that it has been a rally no-one has participated in. We’ve continued to see outflows from equity markets and inflows into bond markets.
“I would love to believe we are starting to see the beginning of global investors coming back to the UK. It can’t get any worse from here.”
He points to one large US-based global fund, as an example; it sold its last UK stock 18 months ago, in the view there is not a single thing listed in London worth holding in its global portfolio.
Opportunities in Clicks and Mortar
Jackson is overweight retailers, which are typically more exposed to the domestic economy. He counts Next (NXT) and JD Sports (JD.) among his top 10 holdings, despite some of the pressures facing the sector. He is not backing “the severely challenged incumbent bricks and mortar retailers” but rather those which are “adapting to the world of the internet or changing their business models to remain relevant for the future”. He also likes the building sector, with investments in paving slab maker Marshalls (MSLH) as well as selected media stocks such as Future Plc (FUTR).
Buxton also sees value in the retail space, especially Next, which he has held in portfolios for years. Online sales account for half its business. “In the most recent results it put out a hypothetical scenario for the next 15 years in which it continues to see attrition from retail stores and store closures, but it would still be a perfectly viable business,” Buxton explains. “Not every retailer is going to go under.”
