Is now the time to Buy British? SPONSORED CONTENT

9 mins. to read
Is now the time to Buy British? SPONSORED CONTENT

Fidelity’s Tom Stevenson asks whether Brexit has left UK Plc trading in bargain territory.

A call to Buy British sounds quaint these days. It’s a throw-back to a time when manufacturing was a bigger part of our economy and we were better at making stuff that the rest of the world wanted to buy. To be honest, it was already an outmoded concept when a well-intentioned ‘I’m Backing Britain’ campaign in 1968 prompted a flurry of patriotic but unsuccessful marketing pushes.

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One of these, launched by Robert Maxwell in his pre-Mirror days, was quietly shelved after it emerged that Pergamon Press actually printed its textbooks and scientific journals in Eastern Europe while the T-shirts used to promote the cause were manufactured in Portugal. When the first episode of Dad’s Army featured an ironic flash-forward scene with the main characters launching the Walmington-on-Sea Backing Britain group, it was all over.

One area where we have continued to fly the flag, however, is in our personal investments. According to the Investment Association’s website, of the nearly £600 billion of retail equity funds under management in Britain, more than a third are held in the three UK categories – All Companies, Equity Income and Smaller Companies. When you consider that the UK accounts for less than a tenth of global market capitalisation, that is a significant overweight to the domestic market.

By comparison, North American funds represent less than 10% of this total, about the same as Europe ex UK, and Japan less than 5%. Around £3 is invested in UK funds for every £2 invested in their Global equivalents. We really do suffer from a serious dose of home bias here in the UK.

The fact that we already own too many UK shares from a strategic asset allocation perspective is not a reason to dismiss the UK as an investment destination if there is a compelling case to do so tactically. To do so, however, would be to go out on a limb in today’s market if the monthly Bank of America Merrill Lynch fund manager survey is any guide. It routinely shows UK shares to be among the least-loved of all investments among the professional investors it questions.

Brexit blues

You would need to have been hiding in a cave to have missed the principal reason for this. Since June 2016, and more intensively in recent months, sentiment towards all British assets has soured as the Brexit debate has descended into acrimony. For many overseas investors the complexity of Westminster politics and the navel-gazing battle for the soul of the Conservative Party has been too much to bother getting to grips with.

The relative insignificance in global terms of the UK’s stock market has made it easy for a US or Asian investor to decide to come back when we’ve got over our collective nervous breakdown and agreed our place in the world. And frankly, who can blame them? If you are a global investor, being over- or under-weight the US, or even a specific area like the FAANG technology stocks, might make or break your comparative performance. Being in or out of the UK is far less likely to make much difference.

The consequence of that international indifference to the UK stock market, however, is that British shares have underperformed their global counterparts in recent years. They are not the worst performers (that honour goes to shares in the rest of Europe) but compared with markets in China, Japan and the US, the last five years have been a very disappointing time to be invested in London.

If you had invested £100 in the FTSE 100 in March 2014, it would have turned into just £107. That compares with £149 for the same amount invested on Wall Street, £130 in Tokyo and £178 if you had accepted the volatility of the markets in Shanghai and Shenzhen.

Attractive valuations

The underperformance of the UK market has meant British shares have become increasingly cheap. On the basis of the forward PE ratio (which measures share prices against expected earnings per share), the FTSE 100 is valued at a historically cheap 12.5 times earnings. That is similar to the market rating in 2003 after the implosion of the bubble, according to data from Goldman Sachs.

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Shares were cheaper during the worst days of the financial crisis and they were a bit more expensive before David Cameron’s ill-fated referendum, but they have now returned to where they were 15 years ago as a multiple of earnings. This, remember, was one of the most pessimistic moments in recent years for stock market investors.

The other key valuation that investors look at, the dividend yield, has also reached an apparently attractive level, with the FTSE 100 index offering an average income yield of 4.5%. That compares with the coupon on a 10-year Gilt here in the UK of less than 2% and base rate at the same ‘emergency’ level of 0.75% that it was slashed to in 2009. If British investors have to wait a while for their shares to perform, they are at least being compensated in the meantime by a very healthy income.

So, there is a compelling valuation case to be made for investing in the UK today. If you are prepared to look through the short-term uncertainty, then buying in at these kinds of valuations is likely to stack the odds in favour of an acceptable outcome in the long run.

Economic resilience

What about the economic outlook? Here it is a mixed bag, but the news is by no means all negative. Growth has been positive if unspectacular, with no sign of the recession that many expected in the aftermath of the 2016 referendum. In the past year, we have seen a recovery in real, inflation-adjusted wage growth with prices rising at around 2% and incomes at more than 3%. The number of people working in Britain rose in 2018 and unemployment has not been so low since the 1970s. Looking ahead, government spending is likely to increase as austerity is unwound slightly. Tax receipts have been higher than expected, allowing the Chancellor to build up a modest war-chest.

With most of the UK’s leading companies having reported their results for the fourth quarter of 2018, expectations have been slightly exceeded, according to data from Goldman Sachs. At the time of writing, about 60% of companies had hit expectations, with 22% beating forecasts and just 16% undershooting predictions.

It’s worth remembering, of course, that the health of the UK economy is an important but not decisive factor in the outlook for corporate profits growth. Among FTSE 100 companies, domestic sales account for just over a quarter of the total, only a little bit more than those made in North America (22%), Asia Pacific (21%) and Europe (17%). Britain’s leading companies really are a proxy for the global economy. This is less true of the FTSE 250, but even among the mid-caps half of sales are made overseas.

Time to wrap the Union Jack round your portfolio?

So how much should investors allocate to UK shares at the moment? On the basis of their comparative valuation advantage and the built-in overseas exposure of the largest companies, a UK-based investor could easily justify holding a quarter of their portfolio in British funds or shares today.

Within this UK allocation, what should the main investment focus be? Given the uncertainty likely to surround the Brexit process for years to come – let’s not forget that the negotiation of trade terms has not even begun yet – I would maintain a prudent balance between cyclical and defensive stocks, growth and value, domestic and international exposure. Without a crystal ball, it is simply impossible to know which of these tilts will pay off in the medium term.

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I would look for contrarian opportunities where cyclical and secular headwinds have created significant undervaluation.One area that springs to mind is real estate, where discounts to asset values have widened dramatically and probably exceed actual reductions in valuations. There are likely to be some bargains in the bombed-out retail space too.

Countering the domestic value plays, I would maintain plenty of exposure to international growth opportunities, especially in areas that have suffered sector-specific headwinds like the oil and gas industry. Companies like BP and Shell have responded to a lower average oil price with self-help, creating a much more cost-conscious industry that can make decent profits and continue to pay attractive dividends with less assistance from the market.

Areas that I would steer clear of include the banks, which really need a significant uplift in bond yields to widen the margin between the rates at which they borrow and lend. Without that cushion, this is a sector with high costs and increasing regulatory and competitive threats.

Thanks to the appetite of British investors for home-grown investments there is no shortage of good UK funds, with a range of growth and income tilts and a focus on all the size bands from blue-chips to micro-caps.

Fidelity’s Select 50 list of preferred funds includes nine of the best of these. Two that I would particularly highlight are:

  • Nick Train’s Lindsell Train UK Equity Fund. A quality-focused fund with a highly-concentrated portfolio of only around 25 shares. This is a more defensive play if you think that the economic headwinds will persist this year.
  • Alex Wright’s Fidelity Special Situations Fund. This is a more cyclical, value-focused fund that will do well if the economy picks up in a more stable post-Brexit environment.

Buy British never did catch on. But in investment, following the crowd was never a good strategy. Now might just be the time to wrap the Union Jack round your portfolio.

The value of investments and the income from them can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Please remember, this is not a personal recommendation to buy funds. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. The Lindsell Train UK Equity Fund invests in overseas markets so the value of investments can be affected by changes in currency exchange rates. It also invests in a relatively small number of companies so may carry more risk than funds that are more diversified. Fidelity Special Situations Fund invests more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. It also uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations.

Sources: Investment Association:;  Wage growth and inflation:; Goldman Sachs UK Weekly Kickstart report FY18; FTSE 100 yield and gilt yield: Financial Times

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