Please find below our Weekly Market Update for the week ending 22nd February 2019.
The intention is to provide a brief insight into the latest dynamics and inform you of any changes occurring within the model portfolios.
Blue Sky Comment
Weekly Market Update
The main driver of equity markets continues to be the US/China trade talks. The signs are encouraging but the March deadline is fast approaching. The outcome has implications for global growth. The uncertainty hangs over markets with recent momentum in stock prices halted, awaiting the outcome of talks.
Uncertainty is everywhere and fear has been factored into prices across many markets. None more so, than the UK, where smaller company stock prices have languished their US counterparts. Yet, the UK is increasingly looking attractive. In fact, as LGTV report “it is cheap”.
LGTV update….opportunities in the UK Equity market, despite and because of Brexit uncertainty!
LGTV have decided to realign their exposure within the UK Equity basket and add the Threadneedle UK Equity Income Fund run by Richard Colwell to the allocation. This is with the aim of further diversifying the UK equity basket through the addition of a fund with a more UK centric, ‘core/balanced’ investment style. This complements the L&G Tracker and the Schroder Fund. It prides itself on not owning the usual stocks, both in terms of names at the top of the index and income stocks: zero weighted in Banks (-10.8% active), zero weighted in Miners (-6.6% active) and underweight to Energy.
Richard Colwell likes the opportunities available in the UK market as a result of Brexit uncertainty. Many of the global firms that are listed in the UK but operate internationally, continue to trade at significantly cheaper valuations than their peers listed elsewhere. This has attracted record levels of inbound active investment in UK corporates. M&A activity is also likely to continue at a faster pace as overseas corporates take advantage of the ‘Brexit discount’. The strategy has a contrarian bias, so there is already a reasonable contingent of less economically sensitive and value-oriented stocks in the portfolio. With liquidity being withdrawn by leading economies at an increasing rate, and the foundations of the global reflation consensus under increasing pressure, any sustained rotation away from the growth consensus should suit their positioning.
The UK Equity market is no doubt one of the best value markets in the developed world now. Regardless of which way you assess the valuation metrics, the UK market is screening as cheap. For example, the UK market on a P/E basis is trading at just over 12x forward earnings or on a dividend yield basis at around 4%. Furthermore, the equity risk premium (the earnings yield less the real bond yield) is approaching two standard deviations away from the norm. The nervousness surrounding the Brexit negotiations has clearly contributed to the valuation gap between the UK and the rest of the world, which is creating arbitrage opportunities for active investors. Of course, issues remain over the Brexit conundrum for Theresa May. However, at some stage, capital allocators will start to consider the value that UK domestic companies offer. Looking at the chart below (from Threadneedle), you can see that UK domestic stocks have massively underperformed their peers, with international earnings, since the referendum in 2016. If a deal is struck, technical and fundamentals could move quickly and the currency may rally.
While not trying to time the market, our Investment Committee is waiting for the current level of uncertainty to subside to some degree, before adding to our current UK exposure.
For further information, please email or call on (01202) 756560.
The Blue Sky Investment Team