Do unprecedented times call for unprecedented investment strategies?
For three years, UK investors have been buffeted one way and the other by Brexit and its implications, whether in the form of the referendum itself, or of parliamentary votes, EU reaction, negotiating developments, economic growth data, economic forecasts, party policy shifts, elections, DUP pressure, Bank of England warnings, changes of prime minister and factory closures, to name but a few.
Indeed, politics in the UK has rarely felt so like a rollercoaster ride. Capturing every twist and turn has been the redoubtable pound. The world’s oldest currency has been convulsed over the past three years. Moreover, shifts in the value of the pound impact stock prices. Companies on the FTSE 100 make most of their profits abroad, meaning that, when sterling falls, those profits rise in sterling terms – taking the stock price up with them.1
Often the shifts on markets reflect changing expectations of the ultimate Brexit outcome, because there is no doubt the form of Brexit could have an impact on the growth outlook for both the UK and many companies that do business in the UK.
“There’s a risk sterling rises and it pushes those FTSE 100 stocks down. If you have to be in sterling and are worried about a no-deal, then you’d rather be in FTSE 100 company,” said Azad Zangana, Senior European Economist at Schroder. “But if there won’t be a no-deal then the FTSE 350 is a better option, although investing overseas is better in terms of the overall portfolio.”
Indeed, the choice of prime minister could itself have a significant impact on market sentiment, given the range of Brexits (or Brexit reversals) currently on offer from Party leaders in the Commons.
“If we have a majority government led by Boris Johnson in the middle of October, I think this will be very bearish and sterling will fall,” said Anatole Kaletsky of Gavekal. “If we have a majority government led by Corbyn then sterling will also fall, if not collapse, at least temporarily. But my view [that a no-deal Brexit will not happen] has not changed. The chances of having a majority government led by either of these buffoons is now as close to zero as anything in politics ever is.”
Yet even if an election is imminent, it will not necessarily resolve where Brexit is headed, let alone bring an end to Brexit-related volatility on markets. So wouldn’t investors be best to manage that volatility by following events closely enough to make fast and timely investment decisions?
“If you’re waiting for the newsflow, you’ll miss out on some of the upside,” says Richard Colwell of Columbia Threadneedle, manager of the St. James’s Place Strategic Managed fund. “It’s portfolio common sense, whether it’s buying emerging markets exposure at the end of 2016 or European exposure in the teeth of the Greece crisis or equities and corporate bonds in 2009, and it always feels uncomfortable, but market timing is a mug’s game.”
Moreover, the balance of Brexit probabilities may be roughly what the market is pricing anyway, meaning that a decisive turn on Brexit could hit asset prices, but is unlikely to completely upend them, as UK assets have already taken a lot of pain – investment in the UK more generally has taken a precipitate fall, too.
“It’s been pretty clear for some time that the Brexit uncertainty has hit investment hard,” says Zangana at Schroders. “We used to see 4-5% rate of growth in 2015-16 but it fell to zero last year and is now in negative territory on a year-to-year basis. Even when companies are standing still, they are replacing and replenishing capital, so it’s very unusual to have it go negative. But our view is that, eventually, Brexit will be delayed and a deal will be done in the first or second quarter of next year. We never expected no-deal to be a very high likelihood. We expect some sort of extension.”
It has, in many ways, been a similar story for UK shares. At least some investors appear to have already assumed what they see as a very negative outcome, and sold off accordingly.
“Valuation is ultimately the key factor in stock investing and, however Brexit arrives, it is not arriving from a clear blue sky,” says Richard Colwell of Columbia Threadneedle, manager of the St. James’s Place Strategic Managed fund. “Since the referendum, share prices have adjusted quite materially, so the market may well go down [further], but it’s not going to be cataclysmic, and I can’t emphasise enough that there’s been this arms race to cleanse UK portfolios from an asset allocation point of view.”
On that basis, the UK market could even be at a point of historic opportunity. Yet if it fell still further, that does not mean select opportunities can’t be found. However, investors who simply respond to the latest piece of political news will find themselves at the mercy of short-term events. Could it be, then, that the current period of volatility is not so much danger as an opportunity?
“Extreme national events often present opportunity, as human irrationality involving fear is evident and that affects valuations,” says Guy Stephens of Rowan Dartington. “Currently, fear is taking hold, and this has affected international demand for UK stocks. Experience tells us that buying undervalued assets in the face of adversity is the hardest thing to do as an investor, but often the most profitable. ”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The information contained above, does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate risks, consequences and suitability of any prospective fund or investment. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
The opinions expressed are those of Columbia Threadneedle and Schroders and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or St. James’s Place Wealth Management.
Source: FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.