Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me is Richard Buxton, Manager of the Merian UK Alpha Fund. Hello.
Richard Buxton: Hi.
Black: So, we are sitting at the start of 2020, and you manage a UK fund. What's the prognosis for the year?
Buxton: Well, obviously, last year returns were extremely strong from UK equities in common with many equity markets. But then, if you look at the two-year context, we've basically made back what we lost in 2018. So, net-net, over two years, we've not really made much progress. And as you know, in the UK, we have de-rated substantially, lots of international and domestic investors have sold out because of the twin uncertainties and the fears about Corbyn or Brexit. Now, surely, we have put at least one of those to one side now.
So, I think that during the course of 2020, economic activity, which was clearly impacted by the uncertainties and people holding off, will begin to unwind and you will see a gradual acceleration and economic activity in the UK during the course of this year. So, clearly, that is very good for a lot of the UK domestically orientated sectors, retailers, house builders, some of the banks, et cetera. So, I think, we've got good exposure to a number of those areas. So, an undervalued currency; clearly, there's going to be potentially an interest rate cut to help the economy through the course of the year; we're clearly going to have fiscal stimulus from the budget in March. All of this, I think is going to contribute to this reacceleration in activity as we finally kind of put the Brexit handbrake behind us.
Black: That all sounds quite positive. But I would imagine it's been quite difficult to be a UK investor for the past few years. How have you found it?
Buxton: It has been frustrating because you have had the sort of long drawn out process and the uncertainties. Again, one of the nice things is that we now have a government with a significant majority, so it is able to make decisions and enact them. Through the back end of most of 2019, I mean, you just felt we were stuck with a government that was incapable of actually governing. So, I know it's been tough. Clearly, this one-year delay in terms of understanding the full nature of our trading relationship with the EU may well at the margin still mean that companies defer some investment decision making, some hiring plans. But I think it's increasingly crystal clear that there would be no point leaving the EU if you were then just to completely align yourself with whatever rules they said, because over time, they are really likely to drift not to our advantage. So, I think, yes, whilst there are still uncertainties, there's lots more to be constructive about.
Black: So, what does this all mean for the fund? Are we going to see some of those unloved sectors come back into favour?
Buxton: I think to some extent, yes. And we've seen a little bit of that clearly at the back end of last year. I think, bigger picture, we are still in an environment where the market loves growth stocks relative to value stocks. And really on a multi-year view, that isn't probably going to change until we actually get the bond market start to worry about a potential return of inflation. So, that may be something only on a two, three, four-year time horizon. But if like the UK and the US are clearly going to be doing significant amounts of fiscal spending, surely at some point because we are relatively full levels of employment and you are starting to see in both countries some pickup in wage inflation, there will have to be a moment when the bond market does actually worry about potentially a pickup in inflation.
So, I think selectively, yes, the environment in the UK will be more supportive of some of the more value-driven situations. As I say, the fact that sterling is not powering away means that actually multinationals are still going to be in a relatively good place. But I think we're not going to see a multi-year sea change in leadership, growth against value until we do get to see the bond yields moving rather higher.
Black: Well, thank you so much for your time.
Buxton: Not at all. Nice to see you.
Black: And thanks for joining us.
