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Abu Dhabi, UAESaturday 23 March 2019

Despite Brexit gloom, UK equities could be the biggest surprise of 2019

Deal or no deal, many analysts say the country is one of the most exciting investment opportunities this year

Illustration by Mathew Kurian 
Illustration by Mathew Kurian 

Brexit is a mess: that's the only thing the UK can agree on as the nation flirts with crashing out of the EU on March 29 without a deal.

Many are unsure what that will mean; while the government has begun stockpiling drugs and food, just in case, the armed forces are on standby and plans have also been made to evacuate the Queen from London if things turn ugly.

Who would invest in a country like this - torn in two, racked by infighting and refusing to compromise? The answer, surprisingly, is many.

Many investment analysts and fund managers say the UK could be one of the most exciting investment opportunities in the world this year.

The FTSE 100 is up 15 per cent since June 2016, while the Euro Stoxx is up just 5.5 per cent, he says. The reality does not seem to fit the notion that the UK has suffered.

Gordon Robertson, InvestMe Financial Services

It is certainly one of the most dangerous. The Bank of England has warned that leaving the EU without a deal could trigger a deep and damaging recession with gross domestic product falling as much as 8 per cent and house prices crashing 30 per cent. That looks overdone. The truth is, nobody knows.

The result is that UK share prices look cheap relative to global markets. Steve Davies, manager of Jupiter UK Growth, recently said UK stocks could rally by 20 to 30 per cent if Brexit is fixed. It’s a big “if” right now.

Seb Jory, head of data-driven strategies at London-based fund manager Tellworth Investments, is also excited saying investors now have a “once-in-a-lifetime buying opportunity” as valuations fall to levels seen once every 10 years.

The UK now trades at a 20 per cent discount to global equities, the widest since the financial crisis, Mr Jory says. “Long-term investors should be licking their lips.”

If the opportunity is clear, so is the threat, as investors could panic on no deal. “However, this presents a fantastic opportunity for investors who can take this type of risk,” Mr Jory adds.

Victor Hill, macro strategist at UK-based advisers Master Investor, says UK economic fundamentals have remained surprisingly robust with output and earnings both up and inflation down. “Living standards are rising and public finances have been improving at last.”

The FTSE All-Share Index fell 11 per cent last year but could recover this year, provided the UK avoids a hard Brexit. “But if there is some kind of deal markets would heave a huge sigh of relief,” Mr Hill says.

Some even argue that no deal could bring good news by giving investors what they always crave – certainty.

David Zahn, head of European fixed income at fund manager Franklin Templeton, estimates the chances of a no-deal Brexit at around 30 to 35 per cent, but said it would not necessarily be the end of the world. “It could offer the quickest route to the certainty markets crave.”

Sterling’s crash might only be temporary, Mr Zahn says. “A lot of people would step in to buy, attracted by the even lower levels.”

A weak pound would make British exports more attractive, while the Bank of England would inject stimulus into the economy. “Our perception is that if a hard Brexit were confirmed, things could only get better,” Mr Zahn says.

Investing in the UK is shockingly risky for such an established country, but could be highly rewarding.

Gordon Robertson, director of financial advisory group InvestMe Financial Services in Dubai, notes that the UK stock market defied the doomsayers after the 2016 referendum, crashing but recovering just as swiftly. It could do it again this year.

“The FTSE 100 is up 15 per cent since June 2016, while the Euro Stoxx is up just 5.5 per cent," he says. "The reality does not seem to fit the notion that the UK has suffered.”

Businesses listed on London's FTSE 100 generate around three quarters of their earnings outside of the UK. When the pound fell more than 15 per cent against global currencies after the referendum, these earnings were worth much in sterling terms, boosting profits and driving share prices higher.

The housing market has also been robust, with latest figures from the Office for National Statistics showing prices up 2.5 per cent in the year to December, although the rate of growth is slowing. Prime central London has fallen slightly as overseas investors exit the market, but they have mostly been scared away by higher taxes on foreign buyers.

Mr Robertson says the FTSE 100 currently yields a generous 4.5 per cent, against 3.5 per cent in Europe and just 2 per cent in the US. “The yield gap is the greatest in almost 20 years, which suggests the UK is undervalued compared to other markets.”

Mr Robertson says it is always difficult trying to time markets, especially in a volatile year like this one. “But buying something inexpensive and being paid 4.5 per cent to wait until it reaches fair valuation sounds like a good strategy to me.”

Steven Downey, chartered financial analyst candidate at Holborn Assets in Dubai, says the UK looks good value according to a common measurement known as the cyclically-adjusted price-to-earnings ratio (CAPE).

This values markets according to their average inflation-adjusted earnings from the previous 10 years, with a number of 15 or 16 generally seen as fair value. The higher the number above that, the more expensive the market.

Mr Downey says the UK stands at 16.69, making it notably cheaper than Europe at 19.24 and the US at a heady 26.64. It is also cheaper than, Australia (19.77), Canada (20.83), Japan (22.6) and India (23.06).

However, it isn’t the cheapest market in the world, as Russia (8.03), Korea (11.59) and China (13.91) look even more attractive to investors happy with a bit of risk, he adds.

Mr Downey says your decision also depends on how much exposure you already have to the UK, and how much you want.

Investing in the UK is simple and cheap, if you use an exchange traded fund. Popular ETFs include the iShares Core FTSE 100 UCITS ETF, which has low ongoing expenses of just 0.07 per cent a year.

Alternatively, the SPDR FTSE UK All Share UCITS ETF spreads your money across the FTSE 100, FTSE 250 and smaller listed stocks, giving wider coverage to all of UK PLC. Annual charges total just 0.20 per cent.

Brexit is looming closer and the buying opportunity may not last much longer. You should only invest money you do not need for at least five years, preferably for 10, 20 or 30 years. Over such a timescale, even Brexit may one day seem like a blip. Let’s hope so, anyway.

Updated: February 20, 2019 05:10 PM

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