Investing opportunities close to home

Graham Smith
Graham Smith
Market Commentator1 November 2018

October, as we have mentioned here previously, is often a time when investor optimism is at a premium. Whether that can be put down to the onset of stormy weather, recollections of falling stock markets in Octobers past or because it’s the time when investors are reappraising prospects for the year ahead, the stock market often provides cause for worry and reasons to seek out investment bargains in equal measure.

So perhaps there is a danger in attributing a greater proportion of the FTSE 100’s recent retreat below the 7,000 mark to uncertainty over a Brexit deal than is deserved. This will not have been the first time the onset of autumn spelled a difficult time for stocks.

Still, the marked increase in volatility in London stocks has been threatening to develop into a more significant move. As recently as at the beginning of this month, and with the index poised around the 7,500 level, a reassertion of the market’s longer term uptrend looked more plausible. Today, rallies above 7,000 constitute good days.

However, we need to be careful. Even after this week’s market falls in America, the real performance gap opened up this year has been between the US stock market and the rest of the world. The UK is not the only European market to have lagged behind the US this year and China and many emerging markets have fared considerably worse1.

With the pound now at a highly competitive level against the dollar – at around 1.28 at the time of writing – it will be clear to some where the opportunity lies. So while positive results last week from Britain’s largest domestic lenders fell largely on deaf ears, HSBC with its strong global presence has been rewarded this week for its positive earnings update2.

There is certainly evidence Britain’s domestic economy may be losing momentum. Bank of England figures this week showed unsecured consumer lending growth slipping last month, but only to a 7.7% annual rate, and falling car sales were largely to blame3.

Given that fundamental shifts in consumer buying habits are underway – including a big move away from diesel – it may be too early to conclude this is a reliable indicator of the underlying strength of the UK economy. Indeed, other borrowings, including personal loans and overdrafts, have remained robust.

As the Chancellor pointed out in his Budget statement this week, wages are now growing faster than inflation and they’re expected to continue in a similar vein over the next few years4. That’s hardly a reason to lose faith now in the UK’s largely consumer driven domestic economy.

Philip Hammond’s pledge to increase public spending together with further increases in income tax thresholds should help the economy next year too. The OBR has hurriedly updated its forecast for economic growth in 2019 in the wake of the Budget, to 1.6% from the 1.3% it had predicted in March5.

Against that background, the potential rewards for investing today in the UK are beginning to look more interesting. Along with the possibility share prices could rebound once the fog surrounding Brexit has lifted, the FTSE 100 Index currently offers a dividend yield of more than 4%6.

Admittedly, like the Chancellor’s Budget, economic growth could be at risk in the event of a “no deal” Brexit.  With the OBR still forecasting sub 2% economic growth over the next five years, the headroom for growth disappointments is beginning to run thin7.

That’s largely why opinions on the UK remain split but also why longer term value investors may find the most to be optimistic about.

Fidelity’s Select 50 list contains a number of actively managed UK equity funds designed to capture “best of breed” companies and value opportunities using a variety of approaches.

Exemplifying two differing approaches are the LF Lindsell Train UK Equity Fund and the Fidelity Special Situations Fund. The Lindsell Train fund currently has large holdings in UK companies with internationally successful brands (Diageo, Unilever, Burberry) and owners of valuable digital intellectual property (Sage) among others.

On the other hand, the Fidelity Special Situations Fund seeks to invest in unloved UK businesses entering a period of positive change. The Fund currently has substantial positions in companies with both an international and domestic focus, including the building materials group CRH, Lloyds and the educational publisher Pearson.

More cautious investors may be interested in the Fidelity Select 50 Balanced Fund. This fund invests predominantly in funds capable of making it onto Fidelity’s Select 50 list and has a diversified exposure to all of the world’s major stock markets. The amounts allocated to equities, bonds and cash are constantly monitored and altered to suit changing economic conditions.

Sources:

1 Bloomberg, 30.10.18

2 Bloomberg, 29.10.18

3 Bank of England, 29.10.18

4 GOV.UK, 29.10.18

5, 7 OBR, 29.10.18

6 FTSE Russell, 28.09.18


Important Information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.