Oiling the wheels
James de Uphaugh of Majedie discusses the benefits of falling oil prices and long-term opportunities in the banking sector.
The UK’s steady economic recovery has remained on track despite a backdrop of geopolitical and market uncertainty. James de Uphaugh, manager of the St. James’s Place UK Growth and UK & General Progressive funds, explains how careful positioning has seen the portfolio take advantage of the prevailing economic conditions.
Q. Has the strong performance of the portfolio last year carried through into 2015?
The portfolio performed well in the second half of 2014, as we were really nicely positioned for the oil price getting a real hammering. In 2015 the UK equity market has been pretty strong, surpassing that totemic 7,000 level, and against that backdrop we’re a nose behind so far this year.
Q. Has the falling oil price benefited the consumer-facing stocks in the portfolio?
I think it’s really difficult to overstate how important the fall in the oil price has been for the UK consumer. If you trace back to the origins of the consumer spending crisis, it really was due to the high average oil price that we suffered between 2008 and 2014. Now we’ve got a big change. If you look at how a company like M&S, which we hold in the portfolio, has fared against that background, the oil price has been a big contributor to its strong performance.
Q. No one could have foreseen the oil price collapse in 2014. How do you incorporate those impossible-to-predict events into the portfolio management process?
Portfolio construction is about playing the odds and balancing risk against potential rewards. What we saw was OPEC maintaining the oil price at very high levels. Of course, the old adage is that high prices will eventually trigger more production, and lead to lower prices. We saw there was a risk building and began to reduce our exposure to oil stocks.
Q. You’ve built positions in a number of banking stocks. What’s your attraction to the sector?
The banks are fascinating at the moment. It’s an area we’ve focused on and one where we’ve bought a lot of shares. In 2007/08, these shares really got it in the neck – for example, RBS fell over 90% and that has conditioned many people’s view of the banks.
However, the reality is that if you analyse them carefully, banks have changed out of all recognition. If you look at the key metrics – capital, assets to equity, loan-to-deposit ratios – the banks are much safer. Added to that, the regulators are forcing banks to retrench their national boundaries, so there’s a little less competition.
We can see the beginning of returns being generated and, as capital builds, dividends will begin to build up again. Lloyds restarted its dividend at a very modest level but it’s a really interesting – almost symbolic – move that augers well for the future.
Q. Are you concerned that the banking regulators may continue to levy excessive fines?
I think the banks realise they’re in payback territory. From a societal perspective, the banks broadly, and the financial system to a degree, were rescued in 2007/08. The very large PPI fines, foreign exchange fines, and the bank levy, all point to that but these are legacy fines. They relate to the past and share prices are about the future. The future is a simpler banking system selling less innovative products, and much less likely to attract fines. The banks now have more sustainable earnings than in the past.
Q. Does it bode well for the continuation of the UK economic recovery that the banks are now in better shape?
The fact that banks are keen to lend again has got to be good for the UK economy and we are seeing a little more appetite from corporates and consumers to borrow. However, I think what’s happened to the oil price is a bigger factor in the recovery, and very positive for the UK and Europe in terms of future growth prospects.
Q. Now that the UK market has reached the 7,000 level, what should investors expect over the medium term from here?
I think investors need to be realistic. We’re coming off the back of a three-year period where the market has been very strong. If you look back to 1960, the average real return from equities over that period was something like 5.5% per annum. Clearly, returns have been far greater than that recently. Investors should think more in terms of the long-run average rather than what’s been occurring over the last three years.
The opinions expressed are those of James de Uphaugh and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James's Place Wealth Management.
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.