FUND SPOTLIGHT 2 - Summer 2019

FUND SPOTLIGHT – 11

F I V E Q U E S T I O N S T H AT I N V E S T O R S A R E A S K I N G M E

MARK RESPONDS TO RECENT INVESTOR QUESTIONS, SHARING HIS THOUGHTS ON TOPICAL ISSUES.

Mark Barnett Head of UK Equities

Q: WHAT IS YOUR OUTLOOK FOR THE UK ECONOMY? Underlying economic and corporate data suggest that the UK economy is relatively robust despite the persistent negativity seen since the EU Referendum result. Bearing in mind the increase in government spending confirmed in the Chancellor’s Spring Statement, coupled with the Treasury’s flexibility to provide further injections after Brexit, it feels reasonable to expect the UK economy to remain resilient. Q: YOU’VE TALKED ABOUT THE DE-RATING OF DOMESTIC EQUITIES VERSUS INTERNATIONALLY ORIENTATED COMPANIES SINCE THE EU REFERENDUM, BUT WHERE DO YOU SEE THE FLOOR? HOW MUCH WORSE CAN THINGS GET? Investing in equity markets is inherently risky and nobody can predict with certainty how much further valuations could deteriorate. However, if we look at data from the past fifteen years we can see that the floor (in P/E terms) has historically been around a 30 per cent discount to the wider market. We are experiencing levels of pessimism not seen since the financial crisis:

Q: WHAT PART OF YOUR PORTFOLIO DO YOU THINK OFFERS THE BIGGEST POTENTIAL AT THE CURRENT TIME AND WHY? To my mind, the exposure to UK domestically orientated companies offers the most opportunity within the portfolios at present. Clarity on our future relationship with the European Union would likely prove a positive catalyst for companies that have de-rated under sustained political uncertainty. Absent a two-year extension, and the additional uncertainty that would come with that decision, it feels we are nearing a point of clarity, if not resolution. Q: INCOME IS IMPORTANT, BUT WHAT ARE YOU DOING ABOUT CAPITAL PRESERVATION? Whilst the portfolios all have a focus on providing income, clearly capital growth is a crucial component of total return. In respect of the portfolios I manage, recent capital growth has been disappointing, relative to the performance of the FTSE All-Share index. As a fellow investor in the portfolios, I feel the effects of any relative underperformance alongside my clients. What I would say is that I remain confident in my investment approach and in the opportunities that currently sit within the portfolios. Despite the volatile and somewhat irrational market pricing we have seen recently, my investment process has not changed. I believe that over time, my positioning of the portfolios will bear out, and that the portfolios have the potential to deliver both income growth and growth in capital.

Figure 1

Investment risks The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Important information This article is for Professional Clients only and is not for consumer use. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals

and are subject to change without notice. This article is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities. Issued by Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.

Source: Barclays as at 31 December 2018. Market = FTSE 350 index.

The inference from this data is that the market is pricing in an impending recession of 3-4 per cent. This feels overly pessimistic and is not supported by underlying economic growth, which has proven relatively resilient. Q: WHAT DO YOU CONSIDER THE POTENTIAL CATALYSTS FOR A REVALUATION OF THE UK EQUITY MARKET? Cheapness. Valuations themselves can become the catalyst for reassessment when discounts become unsupportable. If not, we are likely to see M&A activity. We’ve already seen some of this over the past few months. For example, Dairy Crest, a British focussed dairy business, accepted a bid from Canadian rival Saputo earlier this year. More broadly, any material uplift in the value of sterling versus international currencies and an end to the Brexit uncertainty could also be potential catalysts for a revaluation of the UK Equity market.

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