Against the grain
As bookmakers cut the odds on a ‘no deal’ Brexit, investors need to remember to train their focus on the companies themselves.
In many ways, UK politics appears to be in flux. The election was indecisive, Theresa May’s speech at her party's conference undermined her authority still further, and the resurgent Labour Party is led by a man whose politics sat outside the mainstream for decades. No wonder some investors are tempted to look beyond these shores.
They should not be too hasty. While politics matters on markets, it should never be seen as the primary factor driving companies’ fortunes – and all the more so in a developed market with robust political institutions.
Last Friday, the European Council agreed that not enough progress had been made by the UK on other issues to begin formal Brexit trade talks now. Bookmakers such as Paddy Power have continued to cut the odds of a ‘no deal’ Brexit being reached by April 2019 – to odds now of 2/1.1 Moreover, the first phase of negotiations has become drawn out, as the two sides disagree on the UK’s exit bill. It is not yet clear when the two sides will enter phase two – and start talking about trade. Doubts over the outlook for both the negotiations and the prime minister’s leadership are sometimes reflected in equity markets – yet share prices continue to advance.
Thus, the FTSE 100 hit a record high level earlier this month2 and is up 24% since the referendum of June last year.3 Earnings growth has also been robust following the decision to leave the EU.4
At a sectoral level, scepticism also looms large over UK banks. It has been reported many are looking to move operations out of London to other European cities, in order to maintain ‘passport rights’ across borders following Brexit. Yet Stuart Mitchell of S. W. Mitchell Capital, who manages the St. James’s Place Greater European fund, believes investors should not let these worries put them off, as many top banks have the financial resources to weather the storm.
“We focus on the strongest retail banks and the likes of Lloyds and Barclays are very well capitalised,” says Mitchell. “They are much more disciplined about who they offer credit cards to, when compared with new entrant challenger banks, such as Virgin Money. Should political damage or weakening occur, it will be easily absorbed by profitability levels. Brexit has marginally challenged our view but not enough for us to sell these positions, as we still think there’s significant upside.”
Moreover, despite obvious economic tailwinds in Continental Europe, Mitchell, whose mandate extends across Europe, continues to hold UK stocks, including Taylor Wimpey. The leading housebuilder suffered a 24% hit to profits in its results for the first half of 2017, but this reflected the setting aside of funds to pay fines following a leasehold scandal – revenues, on the other hand, were up 18.5%. The company reported that it had built 9.3% more homes than a year earlier, while also pushing up the average selling price.
“Taylor Wimpey’s share price has continued to increase as Brexit negotiations develop,” says Mitchell. “The company has provided great returns since we purchased the stock in 2009, following the global financial crisis. We purchased it at a knock-down price and have since seen it make a dramatic recovery”.
Furthermore, the rapid post-referendum fall in sterling may have created opportunities for domestic companies with overseas customers. Chris Field of Majedie Asset Management, who co-manages the St. James's Place UK Growth and UK & General Progressive funds, believes the currency’s fall was exaggerated by the market, and that the UK companies he owns will ultimately benefit from a stronger sterling.
“Dixon’s Carphone currently has a low price-to-earnings ratio – one measure of a company’s share price – and isn’t very popular amongst other investors and therefore, presents a real opportunity for value investors. It’s a business that has 25% market share and its share price is much more competitively priced against the likes of Amazon – and for this reason, we believe it has capacity to grow market share”, says Field.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Majedie Asset Management and S. W. Mitchell Capital are fund managers for St. James’s Place.
The opinions expressed are those of Chris Field of Majedie Asset Management and Stuart Mitchell of S. W. Mitchell Capital and are subject to change at any time due to changes in market or economic conditions. This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any strategy. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
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1 www.paddypower.com › Home › Politics › Politics › UK Politic
3 Financial Express Analytics: 23/06/2016 – 23/10/2017 Data from FE 2017