The AIC has collated comments from UK investment company managers on the impact of the election.
Last week Prime Minister Theresa May surprised everyone by calling a snap election for 8th June. The Association of Investment Companies (AIC) has collated comments from UK investment company managers on the impact of the election, the outlook for the UK and where they are currently finding opportunities.
Investment company managers remain unfazed by the election and focused on their investments. The short-term impact of the election last week was sterling strengthening but as Robin Boyle of Athelney Trust commented: “the pound has strengthened recently - no great surprise since it was madly oversold with the world and his dog heavily short.”
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies said: “Investment company managers remain sanguine about the short-term uncertainty caused by the election. Whilst some are keeping their powder dry in this uncertain political environment to see how markets progress, others are taking the opportunity provided by market volatility to add to their favourite positions. Investment companies have seen many elections and have produced good long-term returns for their shareholders. As ever, investors need to take a long-term view and have a diversified portfolio. If investors are in any doubt they should speak to a financial adviser.”
Focus on companies and valuations amidst an uncertain political environment
Alex Wright, portfolio manager, Fidelity Special Values PLC said: “While some investors and commentators will keep a sharp focus on the day-to-day evolution of the political landscape, I prefer to focus on what is happening within the companies and industries I invest in, and avoid skewing the portfolio too heavily towards one political outcome or another. 2016 should serve as a reminder to us all that proper diversification is the only defence against the unexpected.”
Simon Gergel, Manager of Merchants Trust said: “The political environment seems more uncertain than for many years. The nature of the UK's future relationship with the EU is unclear. We are set to have another UK general election, and there are elections in France and Germany, and rising social unease within the Eurozone. Donald Trump's US presidency could lead to unpredictable changes in policy within the world's largest economy, not to mention potentially major changes to foreign policy towards the superpowers of Russia and China.
“It is hard, as ever, to predict where the overall market will go in the short term. We prefer to focus on individual company prospects and valuations when assessing investments and constructing a portfolio. There are many businesses with strong competitive positions offering the combination of an attractive dividend yield and the potential for capital gains for investors. These businesses should deliver good returns over the medium to long term.”
Robin Boyle, manager of Athelney Trust said: “Short-term, I would not advise taking up big positions in advance of 8 June - much better to have a calm, considered look at the French elections first. Longer term, though, I aim to maintain a more-or-less fully invested position and will continue to identify attractive smaller companies in which to invest for capital growth and a rising dividend.”
Prospects for UK, sterling and why Mrs May called an election
Robin Boyle, manager of Athelney Trust said: “Once again, the UK is the second fastest-growing country in the G7: even the IMF has admitted its mistake by increasing its GDP forecast to 2 per cent. But, as usual, the home economy is dreadfully unbalanced with the consumer until recently spending heavily by the use of credit cards and business investment low by international standards. The hope must be (and it is only a hope) that a weaker sterling leads to stronger exports which might encourage more business investment.
“Having said that, the pound has strengthened recently - no great surprise since it was madly oversold with the world and his dog heavily short. As with most crowded trades, they get unwound often to the detriment of the trader. I see more shorts being closed in the weeks ahead with the pound rising to $1.30-35. Expect the economy to soften in 2018 as lending standards tighten and the consumer being a little more careful.
“As for the election, I believe that it was not only the size of the mandate that Mrs May seeks, it was the length so that she does not need to go the country again until 2022, which gives her wiggle room for negotiations plus two or three years of transitional arrangements.”
Smaller companies performing well
Smaller companies rallied last week, with a number of UK Smaller Companies investment companies, including BlackRock Smaller Companies, reaching record share price highs.
Mike Prentis, manager of BlackRock Smaller Companies Investment Trust said: “The UK economy has been performing well and ahead of most expectations at the time of the EU referendum last June. GDP growth, employment data, new housing completions have all been good, and consumer confidence has proved to be fairly resilient to date. We have seen good trading data from companies as varied as sports fashion retailer JD Sports and recruitment company Robert Walters, in respect of their UK operations. Other defensively positioned companies, such as veterinary surgeries business, CVS Group, should continue to fare well, whatever uncertainties Brexit negotiations may bring.
“Of course, many UK listed small and mid-cap companies are very international in their sales. Recently many industrial companies have been faring well as export markets strengthen on the back of weaker sterling over the last 9 months, and given strengthening GDP growth in markets such as the USA and China. We have seen good trading updates from internationally exposed industrial companies in recent days.
“We tend to invest for the medium term, taking care to avoid any significant shorter term risks. Even for more UK exposed companies, there are always some strong enough to take advantage of uncertainty and win market share. The UK is home to many excellent companies offering great innovation and technology with global application. These will not be impacted materially by any short-term uncertainties.”
Where are managers finding opportunities?
Simon Gergel, Manager of Merchants Trust said: “Two major areas offer particular value; selected ‘mega-cap’ companies and recovery situations. Within the mega-caps, we remain positive on Royal Dutch Shell, BP, GlaxoSmithKline and HSBC. Whilst three of these performed very well last year, they all still offer good value. Dividend yields of 5% or more, which look increasingly secure, provide a solid underpinning to their value, with opportunities to grow profits significantly.
“Recovery situations have been a focus for some time. In an uncertain world, with low interest rates, investors have been prepared to pay high prices for companies with relatively predictable earnings streams. The flip side has been that many businesses with strong competitive positions, but which are undergoing specific short term issues, have been lowly valued. There are still many companies trading well below their long term intrinsic value. We continue to have a diversified exposure to recovery situations, particularly within the cyclical consumer and industrial sectors and within financial services.
“Outside of these areas, we see good value in life insurance and utilities, two sectors offering high yields and, in most cases, real dividend growth. Conversely, we see little value in consumer staples sectors, like food producers and beverages, where valuations are high and future returns are likely to be modest at best.”
Alex Wright, portfolio manager, Fidelity Special Values PLC said: “Although in general, there is still a large gap in valuations between cyclical and defensive stocks, the picture is more nuanced than it was 12 months ago, and stockpicking opportunities have become available in some classically defensive sectors, such as healthcare, telecoms and even tobacco. However, the defensive companies I am finding attractive have esoteric features which has led to them becoming unloved in the market and therefore trading at inexpensive valuations. I welcome this opportunity to give my portfolios a more balanced exposure.”
Robin Boyle, manager of Athelney Trust said: “The best opportunities will occur in home-based companies such as populate the FTSE 250, SmallCap, Fledgling and AIM indices such as house-builders, breweries and one or two banks such as Lloyds. Being a small company specialist, my sectors have not really seen any weakness since June last year but I am always looking out for bargains: they can still be found but are much fewer than was the case in 2016.”
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