Beyond the Election – what’s the potential outlook for the UK investment market?
9 June 2017
Miton’s David Jane says while the indecisive election outcome, and subsequent further falls in sterling, mean the UK outlook is even more unclear and make the UK appear even less compelling compared to opportunities elsewhere, there are still some good value situations available.
Beyond the immediate noise of the election, what are the medium term merits of the UK market?
There’s evidence that the effect of sterling’s devaluation and the consequent increase in inflation is beginning to impact consumer spending decisions. Wages have lagged prices – although the lag isn’t material, retailers in particular appear to be having a difficult time. New car sales are also falling, perhaps the impact of the diesel scares and the election has caused a deferral of purchasing decisions, but it’s concerning nonetheless.
Rents are now falling nationwide, suggesting consumers have less income, or maybe more first timers are buying as mortgage affordability is improving. This could be seen in two ways, evidence of consumers having less money or, given that rents are such a high portion of many household’s outgoings, freeing up income for use elsewhere.
On the positive side, the manufacturing PMI data is still strengthening and the overall PMI is pointing to expansion, suggesting the difficulties may be specific to these individual consumer sectors, while internationally faring businesses are doing well from the devaluation.
As ever, we’re focussed on looking for ways to achieve the outcomes our clients expect, and not on making predictions for the future. We look for opportunities where the data and the narrative are out of kilter and the risk reward looks attractive.
For the UK, the indecisive outcome of the election, and subsequent further falls in sterling, means that the outlook is even more unclear.
However, there do appear to be some opportunities in the consumer services area, where expectations and valuations are very low despite the leading indicators remaining strong. Here we favour the pub and restaurant groups. Similarly, we have a small holding in the house builders, where recent slower mortgage approvals and the election have caused prices to weaken short term, and the currently low mortgage rates and wider availability of high loan to value offers mean the background for volume remains favourable.
In aggregate, UK consumer positions comprise one of our smaller macro themes, as we’re able to find many attractive risk reward opportunities globally, particularly in the long-term themes.
Outside of equity we find little attraction in the UK government bond yielding less than 1%, when inflation is over 3%, which means there’s little in the corporate bond market offering a positive real yield either. In this area, we would rather consider the US where yields are materially higher and the era of QE is in the past.
Currencies remain a difficult area, as they can add so much extra volatility for little extra return. So, we have much of our overseas-dominated portfolios hedged back into sterling, particularly the bonds. With overseas currency exposure broadly diversified and at roughly 25% of the portfolios, sterling strength is a risk but unlikely to dominate returns.
Broadly we think the UK now appears even less compelling compared to opportunities elsewhere. We maintain a low overall exposure but recognise that there are some good value situations available.
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