Mark Preskett: Financial markets are following the Brexit negotiations extremely closely and there is understandably a deep sense of nervousness on this subject among UK investors.
While the economic relationship with the UK’s largest trading partner is unclear, we have actually been growing more positive on UK equities.
The first thing to say is the UK economy is not the UK equity market. 70% of the FTSE’s earnings come from overseas, so a weaker sterling is a clear tailwind for many of our international facing large-caps.
Investors are also nervous of a weaker pound. In a no-deal scenario, this may come to pass, but using a simple PPP valuation metric, sterling is oversold in our opinion having fallen 20% against the US dollar over the past two years.
But the key reasons we are positive on UK equities are valuations and earnings reversion.
Earnings per share is an indicator of a stock’s profitability and at the index level, UK EPS has been falling steadily for nearly five years. A lot of this is wrapped up in the commodity price weakness affecting our large energy and mining companies, and struggling banking sector. But it is interesting to see that EPS in 2017 is showing its first meaningful growth since 2011.
Finally, wrapped up with this EPS growth is our belief that the UK market is now reasonable, especially when compared to other developed markets like the US. And as long-term valuation driven investors, we have been buyers of UK equities not sellers.
