- We have re-established our exposure to UK consumer cyclicals
- Sterling is too cheap due to Brexit worries
- International stocks could be losing their appeal for UK investors
- The election may position the UK as a haven of political stability
David Jane, manager of Miton’s multi-asset fund range comments:
“The surprise announcement of a UK general election on the 8th of June was more impactful on markets than might have been expected. Sterling rose nearly 2% on the announcement with obvious negative effects on UK based dollar sensitive companies, i.e. most of the big stocks in the FTSE.
“We have been of the view that sterling is a bit too cheap on Brexit worries and, therefore, have been hedging much of our overseas exposure, across the Multi Asset fund range, into sterling reflecting that the risk of a reversion to fair value was greater than the risk of further declines. So the knee jerk reaction by short term investors to exit their short position in sterling is understandable.
“In some ways the forthcoming election removes a much wider range of uncertainties for investors than just scaring out the consensus short position in sterling. While many elections and referenda in the recent past have been quite close calls, this election is very unlikely to lead to anything other than a stronger Conservative majority.
“As far as financial markets are concerned this means much greater certainty around the Brexit negotiations and government policy in general. This makes the UK look relatively more attractive, from a political risk perspective, than before the announcement, particularly relative to continental Europe where there are close run elections in the three largest economies coming up over the next year. So the UK might be considered a safe haven relative to many other markets, with clear political leadership, an economy benefitting from a weak currency, continued low interest rates and a robust consumer sector.
“Recently, we have been avoiding UK domestic exposure, preferring instead areas of the market with a much higher level of clarity, such as UK exporters, beneficiaries of the weaker sterling and a stronger global economy, or US consumers, where the outlook has been more certain.
“Despite this, the argument that consumers would be driven more by rising employment, wages and house prices than by worries about the Brexit negotiations has always seemed reasonable to us. Indeed the data have supported that view.
“At the same time valuations in consumer cyclical areas in the UK have been at very depressed levels, reflecting these concerns. We think the forthcoming election should materially clarify the outlook for these areas while, at the same time, reducing the relative attraction of international stocks for UK investors.
“For these reasons we have re-established an exposure to UK consumer cyclical companies as one of our macro baskets. This should help diversify our exposure to the broad global reflationary theme while continuing to enhance our preference, in a rising rate environment, for value stocks.”