How to Invest in UK Equities When the Market is Volatile

They say whatever you are doing on January 1 sets the tone for the rest of the year - and if the same is true of trading days then this is set to be a bumpy 12 months for stock pickers

Emma Wall 28 January, 2016 | 4:52PM
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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 Jamie Ross, manager of the Henderson U.K. Alpha Fund.

Hi Jamie.

James Ross: Hi, Emma.

Wall: So U.K. fund, U.K. stocks, FTSE 100. It's been a pretty interesting start to the year, hasn’t it? The FTSE 100 is officially in a bear market. What does that mean?

Ross: Yes, it's been tricky. So the FTSE 100 as we speak is down probably about 8%. The FTSE 250 down kind of similar little bit worse actually so far this year. Very tricky start. So what's driving the market and what are the things that people are thinking about. Well, last year and into this year it's been all about China.

So it's been all about the slow down we are seeing in China. The knock on effect of the currency devaluation we're seeing there and the potential for currency devaluations, competitively across Asia. But also what we are seeing is, we are seeing the start of a rate cycle in the U.S. at the same time as conversely economic data is just starting to slow down. Those two things are concerning people. Then to put icing on the cake there is now concerns over illiquidity in the bond market and that’s starting to really concern people. Illiquidity combined with a fact that we've seen a big sell-off in high yield debt all those things mean that equities are down quite a lot at the start of the year.

Wall: And I suppose that’s a good point to make about FTSE 100 stocks in particularly in the U.K. Actually it’s a global player. It's not a U.K. player. So the fact that there are concerns in emerging markets across the pond all impacts U.K. equities.

Ross: Absolutely right. FTSE 100 is such a diverse index and these days the big sectors are banks, mining, oil and gas all of these things are not driven by how the U.K. economy is doing. They are driven by how the global economy was doing. What's interesting about that is that last year almost completely explains the performance of the FTSE 100 and 250.

The 100 much more international getting a hit because people are concerned about China and a global issue. Whereas the FTSE 250 was much more resilient. What's slightly concerning this year is that actually the FTSE 250 is doing slightly worse than the FTSE 100, even though we are still seeing all these international worries.

Wall: I suppose with that backdrop the question is, how do you invest in U.K. equities when all that’s going on.

Ross: I think what we try and do and sometimes it's difficult. But we try and really stick to what we are good at. So what are we not good at is trying to predict market levels. Trying to predict where the FTSE is going to end the year and trying to position ourselves accordingly. But what we hope we are good at is finding the right companies and investing in those.

And also finding companies that can survive throughout an economic downturn and companies that have resilient business models. And hopefully that's something we're doing at the moment. As I said it's been tricky start to the year.

Wall: And is this the new norm. I mean they always say whatever you are doing on the first of January that’s what you are going to be doing for the rest of the year. If that’s the case for the markets for the first day of trading then we are in for a bit of sticky year.

Ross: As I have been reminded by a few people the first two weeks of the year quite often signal for the rest of the year. So it's slightly concerning. But are we going to change the position of the fund dramatically because we are worried that markets might end the year lower than they are today, no. We'll stick to what we do best and that’s picking stocks, picking the right businesses.

Wall: Jamie thank you very much.

Ross: Thank you.

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

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.

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Emma Wall  is former Senior International Editor for Morningstar