Psigma: Buy UK Stocks, But Not Yet

Both UK stocks and UK bonds have further to fall and will become "outstandingly cheap" later this year, says Psigma Investment Management

David Brenchley 9 January, 2019 | 8:31AM

Theresa May, Brexit, UK stocks, UK equities, FTSE 100, UK bonds, buying opportunity, China growth, China slowdown

UK stocks and bonds will become “outstandingly cheap” in 2019 and present investors with a buying opportunity, according to Psigma Investment Management.

Many asset allocators have noted that, having de-rated heavily in recent months due to Brexit uncertainty, UK stocks are now the cheapest they have been for years. Most UK equity indices are currently languishing at two-year lows.

For some, this is a signal to up their exposure to the domestic market. Indeed, Tom Becket, chief investment officer at Psigma, says Brexit presents just as big an opportunity as it does a risk for investors.

However, as that uncertainty is unlikely to dissipate for a few months, at least until the UK leaves the EU in March, there could be more pain to come.

Therefore, for Rory McPherson, head of investment strategy, doesn’t think now is the right time, to buy UK stocks “because we don’t think we’ve had the capitulation” yet he says.

“You might want to wait until the lorries are backed up on the M20 before you do start to buy UK equities aggressively once again,” suggests Becket.

But, while there will be opportunities in the UK equity market, “investors could find better risk/reward opportunities in UK credit markets”, he suggests.

“Some of the moves we’ve seen in UK credit markets in the last couple of months have been utterly nonsensical. The re-pricing we’ve seen in bank bonds in the last couple of months, for example, have been extraordinary and present a wonderful opportunity for investors.”

Beckett likes both the MI TwentyFour AM Focus Bond and MI TwentyFour AM Dynamic Bond funds, managed by Mark Holman. “The important messages for investors in fixed interest markets now are to be short in terms of duration, be in funds that will not come into challenges over liquidity and are very selective in the bonds they buy,” he explains.

“I cannot personally understand why investors are still happy to keep outsized positions in very large bond funds, which is something we shall continue to avoid doing.”

Asian Equities

Another big contrarian call for the team, which they are currently buying, is Asian equities. The asset class was hit hard in 2018 – a year when most risk assets failed to make a positive return.

The trade war between the US and China was the main headwind, but it’s hard to underestimate the role a slowing Chinese economy played, says Psigma. The continued rise of the US dollar and US interest rates would not have helped either.

But all that did was serve to depress valuations to what now looks an attractive level, according to Daniel Adams, senior investment analyst at Psigma. The price/earnings ratio for Asian stocks now stands at around 11 times, well below the five-year average. A dividend yield of above 3% is also attractive.

Meanwhile, the market currently trades on a price/book ratio of 1.3 times, which Adams says is a level that has historically been a good indicator for buying stocks.

They are also attractive relative to US equities. Admittedly Asian stocks do tend to trade at a discount to the S&P 500, but the mis-match hasn’t been this large at any other point in the past five years. The same is the case on a price/book basis, where Asian equities are at a 16-year low discount relative to the blue-chip US market.

Clearly, China’s slowdown is a concern, adds Adams, but the data coming from the country is currently following a similar path to that seen in both Korea and Taiwan that started in the 1960s. Those two countries managed to continue booming despite a slowdown, too.

Anyway, he adds, “you would expect GDP growth per capita to decline, just due to the law of large numbers… we think that’s what we’re seeing”. “Although there’s a lot of noise there at the moment, the long-term theme is very much still intact.”

Finally, the theme of domestic demand and local consumption will remain in play no matter what happens on the trade front. In 2018 alone, there were 38 million parcels delivered in China per day, which is already 40% more than in the US. By 2020, that’s predicted to grow to 139 million.

Psigma are playing the theme of Asian equities through the BlackRock Asian Growth Leaders fund. Adams likes the management team and rates lead manager Andrew Swan as one of the stars of the investment world.

It currently has a strong tilt towards value-oriented and cyclical names and sectors, “which we think is quite attractive in this environment”. Despite that bias, “the manager is very flexible and is quite opportunistic with his macro overlay so he can actually play volatility quite well”.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BGF Asian Growth Leaders D219.10 USD-1.17-
MI TwentyFour AM Dynamic Bond I Acc162.51 GBP0.00
MI TwentyFour AM Focus Bond A Inc1.02 GBP0.00-

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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