Mark Barnett has revealed he is twice as exposed to the UK-sourced revenues as the FTSE All Share as he awaits a catalyst to reverse Brexit-induced “irrational market pricing”.
In an outlook for 2019, Invesco’s head of UK equities said: “Looking across the UK equity market, we remain convinced that the glaring opportunity lies within domestically focused names.
“It feels as though after an extended period of irrational market pricing, we may finally be at the point of change.”
Brexit, improved global economic growth, and an end to the US-Chinese trade impasse were all potential catalysts for UK domestically-focused stocks to re-rate.
Resilient UK economy
Barnett said UK stocks faced pessimism not seen since the financial crisis and that global investors were failing to recognise the underlying health of the UK economy.
Economic indicators point to “steady, if unspectacular” growth in the UK, he said.
He was unperturbed by Q4 2018 GDP growth, which came in at 0.2% at the first estimate, arguing the fall in business investment would recover once a resolution to the Brexit impasse is reached. He pointed out household and government spending remained resilient in the figures.
Real estate is an area of the UK market he believes offers value.
“Two of our holdings for example, Derwent London and British Land, have been trading at depressed valuations since the EU referendum, despite having provided investors with attractive yields.”
Oil and tobacco
Despite the tilt towards domestic value opportunities, Invesco’s UK equity portfolios still have “significant” exposure to the international earners, he said.
Oil majors, such as Royal Dutch Shell and BP, which are both in Barnett’s portfolios, have been forced to pare back costs to adapt to a $50 to $60 oil price. “The ability of the industry to pay sustainable, covered dividends has meaningfully improved,” he said.
The fund manager also described threats against tobacco as overplayed.
He said moves from the US Food and Drug Administration to ban menthol were unlikely to be successful because the regulator needed to evidence “additional harm” versus non-menthol products.
“Having faced an increasingly hostile regulatory environment over the past three decades, tobacco companies have survived negative headlines, advertising restrictions and even smoking bans – proving their model for profit and cash generation to be resilient.”
He expected tobacco giants would remain at the forefront of innovation around next-generation products.
