A healthy correction
Posted by Guest in Fund and industry updates category on 04 Dec 18
Against the backdrop of recent fluctuations in stock markets, Dan Nickols explains why positioning in the UK mid- and small-cap team’s portfolios remains largely unchanged.
From a thematic, sector and geographical exposure perspective, fund positioning has not changed materially since the final quarter of 2016.
The UK’s economy has been adversely affected by the fall in the value of the pound against other currencies since the EU referendum in June 2016, but the annual growth in its gross domestic product (GDP) has remained around 1.5% in constant price terms. The consumption of goods and services by households, which accounts for around 60% of UK GDP, has been constrained by the squeeze on peoples’ pay (after taking inflation into account) which has only latterly turned positive. Global economic growth, while arguably less synchronised between different geographic regions now than was the case at the start of 2018, is still robust by historical standards. While trade tariff wars represent an unhelpful development, they are likely to slow marginally, rather than fundamentally undermine, global economic expansion.
The indices against which our funds are benchmarked generate between 40-50% of their revenues from international markets. Against our indices, we continue to have a greater proportion of our portfolios, compared to the benchmarks, in the international space – a position that was established in our funds during the second half of 2016 – taking the view that overseas markets are likely to offer a more benign environment for growth than the UK domestic economy. Along with a muted environment for spending by consumers on desired goods rather than daily necessities, key UK sectors which depend on that kind of consumer discretionary spending – notably retail and travel and leisure – are currently also being affected by profound structural headwinds including the shift to online and year-over-year increases in the minimum wage, which makes it incrementally more difficult for such companies to grow their profits.
Structural growth intact
From a thematic perspective, while over the course of October shares in more highly rated, growth-orientated companies have in aggregate underperformed, we continue to have a greater proportion of our portfolios, compared to the benchmarks, invested in companies that look set to continue to grow over the long term, as we judge that they are likely to continue to deliver net profits in line with what is expected at the very least. We do not feel that recent volatility and fluctuations in the stock market mark the start of a fundamental shift in the members of the group of companies doing best in the stock market – rather, we view this as a healthy correction.
Concern about maintaining the long bull run for US equities and the unwinding of central bank support across the globe was bound to trigger increased volatility in the stock market. In our view, the fundamental data about companies are unchanged, however. The world is not a different place, and our portfolio is more attractively valued than before. We’ve been here before. Our big picture view is that this is a buying opportunity and that’s what we have been doing – taking advantage of attractive valuations to top up selectively our holdings in companies that we believe can deliver sustained growth in net profits.
A Brexit fudge?
Turning to Brexit, a wide range of outcomes remains possible. We can debate the probabilities that we might assign to each but our central case would be for a fudge within which the need to make the most contentious decisions is deferred, possibly for a number of years. While this could be expected to give rise to a rally in both the pound sterling and in UK company shares that are more exposed to the economic cycle, fundamental uncertainties are likely to persist and these could be expected to constrain the extent of any such rally.
In this broad scenario, we feel that the current positioning of our portfolios would remain appropriate.
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The performance data does not take account of the commissions and costs incurred on the issue and redemption of shares. The value of investments and the income from them may go down as well as up and investors may not get back any of the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.
This communication is issued by Merian Global Investors (UK) Limited (“Merian Global Investors”), Millennium Bridge House, 2 Lambeth Hill, London, United Kingdom, EC4VP 4WR. Merian Global Investors is registered in England and Wales (number: 02949554) and is authorised and regulated by the Financial Conduct Authority (FRN: 171847).
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