Regardless of your political leanings, I believe last week’s events are good news for the UK in the sense that they will finally offer us some political stability for the first time in almost four years.
I was pleasantly surprised when I saw the exit poll indicating such a strong win for Boris Johnson. My base case had been a 20-40 seat majority win for the Conservatives – but when you read headlines about this ‘once-in-a-lifetime election’ being on a ‘knife-edge’ your mind does go back to the previous election in 2017 and the EU referendum in 2016 – when forecasters got it spectacularly wrong in the build-up.
‘Get Brexit done’ was the slogan which cut through the noise and resonated with voters. I know Brexit is going to go on for years to come, but this result gives the Government the mandate to try and make this happen. There has been so much squabbling between political parties in the past few years – all of which has meant nowhere near enough attention has been paid to the likes of hospitals, schools and infrastructure. All of which should come back into the day job.
Investors will no longer dismiss ‘uncertain UK’
My hopes for the UK market are cautiously optimistic given the lack of progress in the past three and a half years. The whole country has been at a standstill, with little or no investment by businesses or individuals. Cash has been the order of the day in strong market conditions – meaning people have missed out and may end up regretting their caution.
However, from an investment perspective, the UK is still a tough nut to crack, despite this result. We’ve all heard about valuations being down to the tune of 30%, but you have to look at valuations with respect to their own history and other markets. There are no two ways about it: the UK is cheap compared to the US, but it does not mean it is cheap versus its own history and other markets. We saw a 4% jump in UK mid-caps the day after the election – but I don’t expect a long-term rally, as there is still lot of uncertainty and saying and getting Brexit done are two different things.
GDP has been poor in the UK for a while now – but is that tied to individuals not spending money because of the uncertain outlook? This result may finally give us more clarity – or it may at least encourage investors to dip their toes back into the market.
Investors should look to consider recovery vehicles in this scenario. These types of funds have had to be patient given the challenges the UK has had. I believe investors will be rewarded for that patience, but it may take a little longer than some may believe given the Election result.
Products to consider include the Fidelity Special Values trust, managed by Alex Wright, which specifically targets undervalued companies – while also retaining a focus on capital preservation. Another of note is Alastair Mundy’s Investec UK Special Situations fund, which also targets value. Mundy’s approach has historically performed during turning points in investor sentiment.
Casting the net wider for 2020
As we head into 2020, it’s not just the UK that offers value opportunities, with Europe and Japan also looking attractive. I’ve talked a lot about Japan this year, but Europe has big global brand names based on the continent – something which is often overlooked. That is very much a stock-pickers paradise, so finding an experienced manager is important to tap into those opportunities. Janus Henderson European Selected Opportunities fund manager John Bennett and Threadneedle European Select’s David Dudding are both worth considering given their strong and extensive track records in Europe.
The US continues to look very expensive, but that’s been the case for some time now. What we have seen is that if something spooks the US market, it does not have the valuation protection many other developed markets have, and, as a result, can see sharp falls. For example, the 20-25% drop we saw at the back end of 2018.
Unfortunately, I am less keen on fixed income other than as a safe haven given the negative yields – it does feel like a bubble that will eventually burst. Experience is key, so a strategic bond such as the Invesco Monthly Income Plus fund (for income investors) or the M&G Optimal Income fund, are good starting points given the additional flexibility they have.
I would just like to finish by wishing everyone a Merry Christmas and a Happy New Year. Let’s hope it’s a good one from an investment perspective and that last week’s news finally gives the UK the shot in the arm it has needed.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
