I tend to stay away from all things Brexit related but I would observe that UK focussed equities are getting hammered by the all (in my view, misguided) talk about extreme Brexit outcomes. Gary Channon, fund manager Phoenix and Aurora (where I am a non-exec) recently noted that JP Morgan had created a basket of UK stocks focused on the UK economy to track the impact of Brexit and that basket has fallen 17% in 2018. According to Gary “that’s more than the overall UK market, which has fallen 9.5% or the US market (S&P 500) which has fallen 4%”. UK equities are almost in the dirt cheap category.
Anecdotally this pessimism is echoed virtually every week in some new report which suggests that consumers are deeply depressed. The latest is from the widely followed IHS Markit UK Household Finance Index. This tracks consumer sentiment and the latest numbers from this week suggests that “ UK households remained downbeat on expected financial health in one year’s time, with the respective seasonally adjusted index at 46.4, broadly in line with December’s four-month low of 46.2 and among the weakest since the start of 2014……financial wellbeing in 12 months’ time is still expected to worsen, continuing the trend seen in December. This came amid heightened worries over job security, lower cash availability and weakened optimism about the future of the UK housing market.”
Yikes. Time to panic?
I think no, but in attempting to answer this we are forced to confront the Brexit question. From my vantage point, there are two unlikely outcomes, now that the decision rests with the UK parliament (good old Gina M). A no deal Brexit looks hugely unlikely given that that less than 100 MPs actually support this outcome – and a vastly greater number have made clear they won’t ever countenance this outcome. The next unlikely outcome is another referendum – there are simply too many MPs who uneasy or plain hostile.
So, we are left with either
- Accept the existing deal or
- Go Norway
I’m quite drawn to the Norway option, but I think it has close to zero chance of getting through, in the short term at least though if we delay I think the end result will look spookily like Norway.
So, in this scenario analysis we are left with A or B. Personally I think the Prime Minister’s deal isn’t actually that bad – or should I say, it’s the least bad option. It’s a starting point and frankly, if I were a Brexiteer (which I’m not) I’d grudgingly accept it as the best likely deal on offer. My brain says that that is what will happen – the right-wing opposition will be browbeaten into accepting. All my other organs suggest that they’ll hang out and we’ll thus be forced into option A – postpone (with the result 6 to 12 months down the line a much less attractive package for Brexiteers which looks more like Norway). If I were a Brexiteer, I’d follow the excellent Ian Black at The Times and admit that the game is up – and time to fold.
Anyway, my point though is this – it is very likely that very soon we’ll either agree to a deal or we’ll simply kick it into the long grass. In which case, a huge cloud of uncertainty will lift and the true value of many UK equities will be revealed. In these circumstances, it is not impossible to foresee a big Brexit bounce.
And helping this bounce will be two useful, salient points. The first brings us back to the HIS Markit survey. My anecdotal evidence is that lots of people and businesses are simply delaying decision making – they’ll happily start spending again when there is more clarity. Which also underlines another key point – that the UK consumer is not in bad shape. Wages are rising, and unemployment is at a historically low level. There are massive problems for the least privileged, centered around stuff such as low wage and the woeful impact of universal credit, but for most of middle Britain, life isn’t too bad. Which is sort of confirmed by the chart below from the HIS Markit index – this shows that household finances are still not far off recent highs.
Returning to the UK markets I’d also highlight a survey from this week from Link Asset Services. Their latest dividend monitor has just come out and it reveals that
“UK dividends reached a record £99.8bn in 2018, just missing the £100.0bn mark by a whisker…. A combination of rising profits, slightly better-than-expected special dividends, and the slump in the pound in the second half of the year all contributed to a record annual dividend haul 5.1% higher in headline terms compared to 2017.”
Key findings from the report included:
- 2018 dividends rose 5.1% to a headline record £99.8bn
- Underlying dividends (which exclude specials) were 8.7% higher at £95.9bn
- Yield on UK shares hit highest level since March 2009 as share prices have fallen and dividends have grown
- Top 100 set to yield 5%; mid-caps 3.3%; average 4.8%
- Link expects slightly slower growth in 2019 but still a record: underlying growth 5.3% to £101.1bn; 4.2% headline growth to £104.1bn
So, here’s my starter for ten. Brexit will (slightly) resolve itself in the coming months – though we still face the long hard slog of working out a long term relationship with the increasingly bored and exasperated EU.
UK equities are cheap and producing strong cash flow, which is turning into bumper dividends.
Lastly, the average UK consumer is a little fearful but has a strong balance sheet than in recent years and is interested in spending a bit more, when the time is right. So, it is completely possible that we’ll have a UK focused equities bounce with funds such as Aurora doing well !
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