Investment Strategy:  Fourth Quarter 2019 – Specific Market Reviews: United Kingdom

  • Data showed the economy shrank by 0.2% between April and June which was the first contraction since 2012.The surprise decline came after Brexit stockpiles were unwound and the car industry implemented shutdowns. This raised fears that the UK was slipping into recession but these fears were averted, or at least postponed, with the economy bouncing back somewhat in July growing by 0.3%. House prices are rising a meagre 0.7% y/y, the slowest growth in seven years with falls in London and the South. The economy limps on with weak manufacturing but strong consumption numbers. Regular wages are rising by a whopping 3.9%, the highest level for 11 years which is strongly supportive for household spending. Inflation though remains muted with CPI falling to 1.7% y/y in August, down from 2.1% in July.
  • The most recent Bank of England utterance is that recession will be averted but that ‘political events could lead to a further period of uncertainty’ Whatever can you be referring to Mr. Carney? UK interest rates remain unchanged at 0.75% so Carney is not at this point following the example of the Fed and the ECB but instead keeping his powder dry until the great events unfold.
  • Apart from the most rosy-spectacled wearing Brexiteers the consensus is that a no-deal Brexit will be bad for the economy. There is though absolutely no consensus at all about how bad it will be. In truth, it will be years before the true cost is known and the more immediate concerns are social rather than economic with the potential shortage of food and medicines and problems at the Irish border front and centre. Operation Yellowhammer made sober reading.
  • The UK remains the pariah of global equity markets, deemed ‘un-investible’ by overseas investors and increasingly by the home team too for the most obvious of reasons. Contrarians sense great value and opportunity, trend followers cite a value trap saying cheap can get cheaper. Nothing will change until some resolution on Brexit, but despite all the fear and loathing associated with this word it can still be a catalyst for unlocking this perceived value. The corporate world is certainly looking at a different picture to the stock market as cheap sterling and the deep pockets of private equity firms have led to a number of takeovers in the mid-cap space.
  • The all-enveloping pessimism surrounding the UK means that the market trades on a relatively cheap 12x forward earnings. This is coupled with an enticing yield of 4.2%, well ahead of the long-term average of 3.5%. Value opportunity of value trap? I’m more inclined to the former.

Summary: Equity markets held on to the gains from the first half of the year but remain a hostage to Brexit with the spectre of a Corbyn Government an increasing concern. The market is though cheap in comparison to other global markets and is supported by a high dividend yield.

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