Has Brexit fear created value in UK equities for 2018?
What lessons have you learned from 2017?
‘Lessons learned’ are one of the hardest questions for investors. It implies mistakes, negligence, or just bad judgement, all mediated by that renowned arbiter of good investing, Mr Hindsight. Always convincing, and armed with perfect (albeit selective) historical evidence, he is the ultimate momentum investor, drawing all his lessons from last year’s outcomes.
But in a year of intense political manoeuvrings, with many investors almost completely giving up on any traditional measure of value, it may be dangerous to dwell too much on what didn’t work in 2017. Any snap-back for value-biased strategies from here may suggest very different lessons to be learned. For ourselves, the crucial lesson has been the importance of maintaining investment parameters and staying diversified, so that strategies that do not work do not have a disproportionate effect on performance. No matter how confident we may be about a situation, events occur and, for the benefit of Mr Hindsight, they are often unforeseen.
What are the key themes likely to shape the UK market in 2018, and how is this likely to impact portfolio positioning?
2018 is likely to be a seminal year for the UK. While we leave 2017 with the jury still very much out on the wisdom of the Brexit vote, by this time next year we are going to know what our future relationship with Europe will be. We are optimistic that our political leaders will now start to move away from posturing in favour of seeking practical solutions – if only because time gives them little alternative. With the UK market as universally out of favour as it is now, any move towards a more accommodating relationship with Europe could, from here, have a disproportionately positive effect on both sterling and UK equities.
What do you see as the key risks and opportunities for 2018?
At the risk of repeating our mistaken call this time last year, we stick to the view that the UK provides one of the few remaining compelling investment prospects for the year ahead. Very few other markets hold that combination of low valuations, low expectations and clear opportunity for reassessment, possibly in the very short term. The greatest opportunities are in domestics: consumers, financials, or groups exposed to government contracts, but many exporters and overseas earners have also been unfairly caught up in the sentiment collapse. We have now reached the point that all these sectors have scope to perform well next year even without an improved political landscape. But we might be wrong.
These are the manager’s views at the time of writing. References made to sectors or asset classes do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase them.
Value-biased strategies: Value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase.
UK equities: ‘Equities’ as an asset class means investments in shares in a company, representing part ownership. UK equities are those companies registered and with their primary operations in the UK.
Domestics: Companies focused primarily on domestic markets, rather than international ones, such utilities, smaller banks and other local businesses. They are more affected by domestic issues, but have the advantage of dealing with only one currency, local regulations and a single tax system.
Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.