Speaking at AJ Bell’s Investival conference on Thursday, the manager of the £10.5bn Invesco Perpetual High Income fund said markets and investors have become overly bearish on the prospects for the domestic economy, which has led to many firms being unnecessarily de-rated.
Post-EU referendum, UK and international investors have become understandably wary of the prospects for the country’s economy, but Barnett believes this doesn’t gel with the current growth and earnings picture.
“The market is trying to say that Brexit is an accident waiting to happen and while I will accept that the UK economy has slowed this year from where it was last year, I think we can all agree on the fact that the economy has performed an awful lot better than people were expecting,” he said.
The trend in recent years has been to swiftly de-rate stocks that have suffered an earnings downgrade, even a relatively modest one.
Domestically focused firms like Capita and high street retailer Next, which both suffered earnings downgrades in the past several years among other mishaps, have seen their price to earnings value unfairly compressed, in Barnett’s view.
Even more international firms like low-cost airliner Easyjet and security company G4S have been swept up in the stock market short-termism and taken a hit to their p/e ratio after their earnings were revised.
“This really is still a stock market that rewards momentum in revenue but rejects concepts like the intrinsic value of a business,” Barnett said.
“All investors seem to be interested in at the moment is worrying about where the internal earnings are going and forgetting about what might be the longer-term value of that business.”
Meanwhile, investors have continued to “pay up higher multiples for companies that just aren’t worth it”.
Eventually, Barnett said the sizeable gap between the highest and lowest valued UK companies will narrow either because of US monetary tightening, stronger sterling following more clarity on Brexit or investors simply getting fed up of extremely stretched valuations.
Unloved real estate
Since Barnett inherited Neil Woodford’s equity income vehicles, he carries many of the same holdings and risks of his predecessor. But some of his latest investment calls have diverged from Woodford’s own, notably Barnett’s bullishness on the oil and gas sector and big tobacco.
On Thursday, Barnett remained gung-ho about companies in both spaces, as well as UK and overseas pharmaceutical firms.
He also said he was finding opportunities in the unloved real estate sector, particularly companies focused on the London market like Shaftesbury, which invests in rental properties across London’s west end, and developer Derwent.
“They are selling assets in the market at book value or premium to book value and are trading at a 25% discount. That’s an arbitrage that some of these companies are taking.”
