Speaking at an event in London, Richard Colwell, head of UK equities at the firm and Chris Kinder, co-manager of the UK Absolute Alpha Fund said that, while the triggering of Article 50 next year and the ongoing uncertainty around exactly what a post-Brexit Britain will look like will likely induce a slowdown in UK domesitic growth in 2017/18.
However, Britain is not alone in facing economic and political headwinds and that, given how hard they have been hit, the valuations of stocks exposed to the UK domestic economy look relatively attractive.
“It is not about finding the next Google, it is about finding those companies that are priced for relegation that are actually likely to end up mid-table,” said Colwell.
As an example of this Colwell pointed to was UK supermarket giant Morrisons, which he said would be the stock that is going to be on his tombstone.
“It is the most shorted stock in the market and it is up 50% this year. I certainly wouldn’t want to declare victory. As the CEO says, it is in the foothills of its recovery, but in a mature industry it is doing the right thing and from an investor point of view it is producing cash, it is rapidly de-levering and it is reducing its debt,” he added.
For Colwell, the big question ahead is whether or not the country is going to be able to exploit the material adjustment in sterling seen since the referendum for the benefit of the economy.
“For the past seven years every economy has been trying to chase their economy lower, we now have a legitimate reason for our currency to be where it is. I think although the referendum may have accelerated things, economically the cycle was already mature, we were likely to see a slowing growth profile into next year regardless of the referendum,” he said.
Consumer confidence
Kinder agreed that sterling is a major focus point but said the key determinant from here is going to be the ongoing health of the consumer.
“Clearly the big corporations are worried about the implications of Brexit,” he said, “that is going to impact both confidence and hiring intentions. But, I think the consumer is likely to weather the storm.”
On top of this, he said, there is the prospect of fiscal stimulus coming through which could bode well for some of the more domestically focused sectors.
In particular, he said the firm is looking at housebuilders and construction which have been very hard hit by Brexit.
“Even with very prudent growth assumptions, we have stress tested many of these stocks and the valuations look anomalous,” he said.
Asked how this changes the shape of his portfolios in terms of the size of the companies in which he invests, Kinder said many of the opportunities lie in the mid cap space.
“This sort of approach will intuitively take you toward the mid-caps because pound for pound you are going to get a bigger bang for you buck, in terms of portfolio construction,” he said.
However, he added, in order to be convinced to move toward the midcaps, there needs to be evidence of a liquidity premium, and that has clearly been re-established in recent months.
“I came in to Brexit with the lowest midcap weighting the fund has ever had and I am really challenging myself now to move that away incrementally. I am not going to allow the size debate to dominate the returns but they are now looking relatively cheaper,” he said.
