Why UK Chief Execs are Positive Despite Brexit Uncertainty

Economic growth may be downgraded and UK politics may be in turmoil but Britain's chief executives remain positive says Edentree's Phil Harris

Emma Wall 12 October, 2017 | 9:00AM



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 Phil Harris, manager of the EdenTree UK Equity Growth Fund.

Hi, Phil.

Phil Harris: Hello.

Wall: So, a lot going on in the UK at the moment. Economically, we seem to be not doing as well as hoped with a couple of forecasts being downgraded and indeed, politically, there is a significant turmoil, not least around the future of our Prime Minister. As a UK equity investor, how much does this sort of turmoil play into what you do?

Harris: It does very much so. I mean, I think, it's fair to say that at the start of the year we thought the UK economy was a little bit stronger than it's going to be. There clearly has been a little bit of uncertainty, not just Brexit but clearly the general election over the summer has been – there has been a little bit of a slowdown in consumer spending.

It's interesting though, if you go out and talk to companies, the Chief Executives, although there's huge uncertainty of a Brexit, actually when you talk about individual companies, they are still pretty confident. So, if you ask a Chief Executive and he will moan to you about what's going on, the next question must be, therefore, you must be cutting your CapEx, you must be doing other things. Oh, no, no, no, they will say. Actually, things are very strong. My individual businesses are doing very well.

So, although there is that uncertainty on both the consumer and the investment front, actually things are reasonably good at the background. There has been a bit of a temporary slowdown, a little of that is inflation is coming through, but we are reasonably positive going forward in the next year that things will turn around quite quickly.

Wall: And why is it that Chief Executives are positive? I presume it's because not all of the stocks that you invest in, although not all the Chief Executives that you talk to, are wholly domestically focused.

Harris: No, that's absolutely correct. So, a large percentage of the earnings for the sort of UK Plc are overseas. So, about 60% to 70% generally the overseas earnings are there. So, companies very much are talking about the European economy which is very strong, Asia which remains very strong and obviously, the US as well.

So, although there's a domestic focus to many companies, they are looking more globally. They are still seeing interest rates very well; they are still seeing inflation is very low and a general backdrop that's quite favourable. So, they are sort of riding through any particular UK problems and looking more generally.

Wall: And what about the UK consumer, because we are in an economy that is built very much on consumer spending. Consumer confidence may well take a hit with Brexit. Is consumer spending a metric that you consider when looking at investment?

Harris: Very much so. And I think, also, it's not just the overall level of consumer spending, but it's actually how people spend their pound. So, if you look at things like bit-ticket items, like cars or sofas or big sort of purchases like that, the consumer is relatively cautious at the moment with a limited amount of money. Wage growth is very anaemic. With a lot of jobs unemployment is very low. But actually, if you are in a job, you have very little wage growth, perhaps 2%, 2-and-a-bit percent. Inflation is near at 3%.

So, what you're looking to do is to target your pound on to something – and what the people are doing. They are still going out for the coffees; they are still buying the Domino's pizzas. They are still buying those low-ticket items and also, they want their holidays. So, they are allocating that pound perhaps rationally into the things they want and deferring other things they don't and that does drive our investment process. So, we avoid motor retailers, high-ticket consumer stocks and look at low-ticket consumer stocks. Domino's Pizza we mentioned, Patisserie Valerie. So, yes, very much that sort of thing does drive our investment process.

Wall: Phil, thank you very much.

Harris: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
EdenTree UK Equity Growth B284.23 GBP1.04
About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk