UK: fear or opportunity?
DOWN SIDE: BREXIT POSER HITS MARKETS
Just because the country’s stocks look cheap does not mean it’s a free-for-all. Moneyweb
One of Warren Buffett’s most famous investment sayings is “Be fearful when others are greedy. Be greedy when others are fearful.” If this sentiment is true, then one would assume the UK is offering a smorgasbord of investment opportunities.
The pound is hovering at its lowest level in 10 years with the exception of 2016/2017 when the implications of the Brexit vote started to trickle through.
At the same time the FTSE 100, a good barometer of market sentiment, has fallen sharply from its May 2018 highs.
Driving the negative sentiment is the ongoing political paralysis over Brexit and the possibility of a no-deal scenario that could yet cause challenges for the UK as well as European and world economies. Investors, already spooked by US and China trade tensions, have responded by selling out of sterling and the FTSE.
Yet the UK economy continues to tick along, albeit not at the speed of the US economy. It grew at 1.3% in 2018, and the European Commission predicts 1.2% growth for the coming year.
While the journey to the March 29 deadline for Brexit negotiations will continue to be a thrill ride no UK citizen anticipated, global investors are watching events with interest.
Fantasy
“We have a larger exposure to the UK market than many of our peers, but I would not say that we have taken a massive bet,” says Douw Steenekamp, portfolio manager, global equities at Denker Capital. “The Brexit negotiations will be crucial. Politicians are playing high stakes poker. A nation’s biggest trading partners are those that are closest to it. This fantasy that they can replace the EU with Japan, Australia or even SA is just crazy.
“If the UK plunges out of the EU it will not be good news in the short term; if they tear up Article 50 and remain part of the EU, the market and currency will rebound; and the middle road – an extension of the deadline to May – will just prolong the mess.”
As a result of the uncertainty, some stocks have been derated to the point that they are looking attractive.
“If one looks at the broader market on a price-to-book basis, it has been this cheap less than 10% of the time over the last 20 years,” says Nic Norman-Smith, CIO at Lentus Asset Management. “And every time it has been this cheap, the market has followed with solid returns over the next five-year period, historically by between 5% and 10% per annum.
‘You need to dig deep’
Zain Wilson, a portfolio manager at Old Mutual MacroSolutions, adds that while the market looks cheap it is not a wholesale buying opportunity. “Often, when assets are cheap they are cheap for a reason. There are opportunities in the UK, but you need to dig deep to find them.”
Like the JSE Top 40, the FTSE 100 is not an accurate reflection of the UK economy. Many of the large-cap stocks listed in the UK are global companies that are not that exposed to the underlying UK economy. Unilever, for instance, generates 5% of global sales in the UK, BP even less.
The FTSE 250, home to more mid-cap and domestically focused stocks, is a better reflection of the UK market. It fell 25% between June and December last year, before rebounding slightly in January, compared to the FTSE 100, which fell 17% in the same period.