Chief Investment Strategist
Market Update, Alan McIntosh:
UK shares had a poor August with the FTSE All Share Index falling by over 4%. While it is tempting to associate this with increasing fears around Brexit, closer examination would suggest that this is not entirely the case. Other global equity markets also had a poor month, with worries about slowing economic growth and heightened trade tensions between the US and China a major factor. When you look at the composition of the UK stock market, you can get a better understanding of the moving parts that contributed to the overall performance of the UK market.
Despite the apparent political meltdown in the UK over the past few weeks and the potential impact on the UK economy resulting from a no-deal Brexit, the biggest contributor to the fall in the market last month was the weakness in resource stocks – oil and mining shares, which make up over 20% of the index. This decline was more to do with China than Chingford! The other weak area was banks and insurers (another 13% of the index), where falling interest rate expectations around the world impacted on the share prices of global financial stocks. Most of the largest companies listed in London are more exposed to international events than to changing domestic circumstances.
Having said that, there are a number of questions that arise when looking at the UK market. Firstly, are UK shares being shunned because of Brexit fears? The forecast price earnings ratio (p/e) of the UK market combined with a high dividend yield would certainly suggest that the market looks cheap. However, the large exposure to commodities and financials partly explains the higher yield when compared with other markets, while the lack of exposure to faster growing technology companies (1% of the UK index compared with 22% of the US index) goes a long way to explaining the p/e discount.
What about domestic facing companies? To be fair, sectors such as property, retailing and leisure, as well as some industrial companies, are probably trading at an extra discount because of the additional economic uncertainties facing the UK at present. This, combined with the weakness in the pound, has triggered takeover activity from foreign purchasers. Recent examples include pub and brewing group Greene King, and Alton Towers operator Merlin Entertainments. But many companies on the high street (and the property companies behind them) are suffering because of a longer term shift in consumer behaviour, which is unlikely to change, irrespective of the Brexit outcome.
In conclusion, there may be parts of the UK market that look cheap (or expensive), but often with some justification. While “buying the index” will give you the good as well as the bad, an active investment approach will still allow you to identify and capture the best opportunities across all sectors.
Economic Update, Richard Carter:
It promises to be a momentous week on the Brexit front as MPs return from the summer recess. Anti-no dealers will try and bring forward legislation designed to force the government into extending Article 50 but it is not clear that they have enough support from potential Tory rebels. In any event, the government may respond by calling a general election and there is a lot of speculation about October 10th and 17th as possible dates for the country to vote. For that to happen, Johnson would require the support of two-thirds of MPs because of the Fixed Term Parliaments Act and it is possible that Labour would want to see a no-deal ruled out first before they agreed to an election. Not surprisingly, Sterling is starting the week on the back foot as the UK’s political situation gets even more fraught.
Elsewhere, there remains significant concern about the impact of the US-China trade war and the potential warning signs from the inversion of the US yield curve. Another possible recession indicator is the large gap opening up between certain measures of US consumer confidence. The more backward-looking Conference Board survey is still looking good but the more forward-looking Michigan survey has weakened noticeably of late. Much will depend on the response of the Fed and whether Trump decides to strike a deal with the Chinese ahead of next year’s election.
On the data front this week we will receive the US ISM survey and nonfarm payrolls.
Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.