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UK market: A Black Friday bargain?

Black Friday bargain
Looking at what funds are getting good flows, we see that for the second consecutive month and for the fifth time in thirteen months, ‘UK All Companies’ funds have the worst sales numbers of all IA sectors. We look out of favour. The Bank of America Merrill Lynch survey of fund managers, taken around the globe, reflects that the UK is the least favoured region of all. Low demand is reflected in lower prices. Might now be a good time to invest? Or has the long night only just begun?

Does cheap mean good value?

It is fair to say that the UK appears relatively cheap. Looking at index levels only, FTSE 100 is close to its value at the turn of the millennium and the broader FTSE All Share index is ahead by only 20%. Looking at total return (adding in reinvested dividends) the picture is a great deal better, of course. But the lack of capital appreciation over two decades is stark. The UK market is not full of bad stocks. The UK can offer established, multinational, innovative and successful companies across many key sectors. Parmenion has just gone overweight to the UK, in our Tactical portfolios. So, why don’t foreign investors like us?

Brexit means….what?

It would be wonderful to be able to turn the page on Brexit, but it is the hot topic Advisers raise with the Parmenion investment team. …“Are you thinking about moving money away from the UK?”, “Are you positioning for a bad outcome?” These are the sort of questions Advisers’ clients seem to have in mind.

Markets are moved by the unexpected. To put that another way, current prices are a reflection of current expectations. This is really what separates where we are today, from the run up to the referendum in 2016. Markets expected the UK to remain, even though the polls told us it would be close and when the votes were added up, markets moved. Fast.

If money has been coming out of the UK ever since the referendum and global asset allocators are more underweight in the UK than anywhere, what does that tell us about perceptions? It implies that Brexit (in whatever form) is expected to be negative for the UK – or at very least that it creates unwelcome uncertainty. The stock market therefore is already priced to reflect uncertainty and a weaker economy.

But the FTSE is not the UK economy!

Domestic companies have been and will be the most impacted by the consequences of Brexit. But the FTSE 100 is full of multinational companies. The vast majority of its revenues are earned overseas, in fact somewhere between two thirds and three quarters depending on how you make the estimate. However, the exchange rate at which that revenue gets translated back to Sterling will depend on the Brexit negotiations. As a result FTSE seems to move daily based on Theresa May’s grip on power. Uncertainty reigns. Different parts of the market will react in opposite directions depending on what “Brexit” comes to mean in practice. Could currency gains on a weak pound matter more to investors than domestic economic prosperity?

Great expectations

A stock is only good value if its price is going to rise relative to others. A catalyst for change is always required. Without a new, positive factor even a good company can stay cheap for a long, long time. So what might be the catalyst for the UK? Could it simply be, no more bad news?

A lot of our best companies have suffered from negative sentiment at the hands of Brexit. If this cloud begins to shift, share prices could lose their Brexit discount and begin to reflect company balance sheets and future trading prospects, not national challenges. Cheap might begin to look like great value. Any pound spent this year in ‘Bargains Prices UK’ may look like a steal once Brexit is in the history books.



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