Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Richard Buxton, Manager of the Old Mutual UK Alpha Fund.
Hello, Richard.
Richard Buxton: Good Morning.
Wall: So, your fund has done pretty well this year, up 9.5%, 8% up in the last three months since Brexit. So, I suppose that begs the question, did you know the result?
Buxton: Absolutely not. I was very public and vocal about saying, don't worry. It's not going to happen. We'll stay. However, I had felt over the last 12 to 18 months that some of the very large international companies have got very cheap, very under-owned by U.K. investors.
So, I have been increasing exposure to those, which of course, with the weakness of sterling, has led a very positive result in the last three months. As the currency has gone down, you've had automatic upgrades to profit forecasts for those very large international companies.
Wall: I suppose the forecast still was make a fool of everyone. But looking forward, we're still very early days. How do you begin to manage a portfolio of U.K. stocks when Brexit hasn't even begun to happen yet?
Buxton: Well, absolutely right. It's going to be an incredibly long drawn out process and the uncertainty is going to hang over the economy and companies for two to three years at least. I think sterling is going to continue to remain under pressure. It is the safety valve if the chancellor is going to start spending money on infrastructure, then the budget deficit is going to start to go out again and we've still got our trade deficit.
So, I think still having that focus on big multinational companies is going to be something that's appropriate for quite some time to come. Now, it doesn't mean that domestic companies are for the birds. I think there will still be very successful companies that will be able to operate well. But I think ratings are going to be under pressure in that area of the market for some time.
Wall: Are there specific areas of weakness then where you think at the moment actually there's too much risk?
Buxton: I think it's more a question of the valuation because there's a price for everything. If shares get to levels where they are pricing in a really bad outcome for the U.K. economy, which I don't expect. I think it's going to be very sluggish, but I don't think we're going to have a severe recession. Then there will be opportunity to even retailing and so on.
I'm still very happy holding housebuilding share. I think the housing market will still be absolutely fine. So, it's not sort of complete avoid areas. But I think it's just – you've got to mind your eye and the bias really still was, say, towards these big overseas earnings companies will be the way to go.
Wall: Do you think then there will be a correction because we're dallying with near all-time highs here at a time where a few months ago we were told in the event of Brexit everything would completely collapse.
Buxton: Well, firstly, I mean, global markets remain at all-time highs or near all-time highs. Central banks continue to pump liquidity in. Obviously, as the fed moves probably to start nudging rates up again by year-end, some of that liquidity is going to be at the margin reduced. But provided economic growth globally sort of potters along, it's nothing special, but as long as it's okay and we get therefore some earnings growth, then I think markets can do okay.
Brexit was never going to prompt a sudden collapse in the economic activity in the U.K. At the end of the day, people voted for it and so they are carrying on spending. But I think over the course of the next 18 months, companies will just at the margin pull back a little bit from spending and it's the rate of change in unemployment which will affect consumer confidence. Obviously, it's been fantastic for the last two, three years, rising levels of employment. But as that begins to slow and heaven forbid, just reverse slightly, then I think, as I say, the economy is going to feel pretty sluggish; but again, not a disaster. So, I think, we're okay.
Wall: Richard, thank you very much.
Buxton: Not at all.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
