Buxton Backs Britain: Now is the Time to Buy

Political uncertainty and question marks around Brexit still weigh on investors minds' but Old Mutual's CEO is siding with the corporates' view; UK Plc is alive and kicking

David Brenchley 20 April, 2018 | 9:57AM
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Sentiment towards UK equities continues to run at near record low levels amongst global institutional investors and wealth managers. But far from gloomy, Old Mutual chief executive Richard Buxton believes now is just the time to “fill your boots”.

Portfolio allocation to UK equities was at a historic low in March, according to Bank of America Merrill Lynch’s global fund manager survey. While that moderated in April, a net 33% of managers still say they are underweight the region.

Political uncertainty and question marks around Brexit still weigh, with billions of pounds having already flowed out of UK equity funds in the past year.

As a result, the valuation of many UK companies – particularly those most exposed to the UK economy – has dropped to long-time low levels. And some fund managers see a great contrarian opportunity to pick up good companies at cheap prices.

Buxton, manager of the Morningstar Silver Rated Old Mutual UK Alpha Fund, says a stockbroking acquaintance of his revealed one of his clients had sold his last UK equity back in January – “not a single company in the UK did they feel they wanted to own”.

But, as we’ve pointed out recently, he notes there is a “fascinating dichotomy” between the global fund management industry’s attitude towards UK companies and overseas corporates’ views.

In the global fund management community – as well as more generally in retail investors’ eyes – “no one wants to know about the UK; it’s all about going global”.

“Yet compare and contrast that with the fact that virtually a week doesn’t go by without some overseas company wanting to buy a UK company,” he adds. “The corporates see real value in UK companies and global and domestic investors see no value at all.”

Despite this, the UK equity market is trading on an attractive forward earnings multiple of 13 times. “I’m siding with the corporate lot,” Buxton concludes.

The manager thinks last year’s trend that saw the UK economy decelerate, with rising inflation eroding real incomes, will reverse over the course of 2018. Buxton now sees inflation gradually falling away and real incomes expanding alongside a return of “probably a little bit of wage growth”.

As a result, he thinks we’ll end up with a 2% GDP growth figure for 2018, rather than the OBR’s current 1.5% projection.

Banks and Retailers: Unloved but Favoured

Two unloved areas of the UK market the Old Mutual UK Equity Income fund is playing are domestic retailers and banks.

On the retail side, manager Ed Meier says falling inflation and expanding real incomes will alleviate some of the pressures the UK consumer has been under since the Brexit referendum. This will, in turn, alleviate some of the cyclical pressures some of the high-street retailers have faced.

Still, there is the structural change in that sector – the Amazon effect. But Meier says his team’s process of picking stocks “judiciously” will ensure the fund does not fall into that structural trap. “But maybe if they’re tarred with the same brush, you can pick up stocks relatively cheaply and enjoy upside,” he continues.

One of these is Next (NXT). Widely seen as a high-street bellwether due to being the first to report its results, the chain tends to have a good quarter followed by a bad one, followed by a good one.

However, Meier’s team bought into the company recently and thinks it’s one that has the infrastructure to repel the threat of competition from Amazon. “Next has a great online and international operation and has a very flexible leasehold estate,” he explains.

On banks, he’s taking heed from trends seen in the US. The big names over there were in 2016 given the go-ahead to return excess capital to shareholders having sufficiently healed their balance sheets and put into place cash buffers.

A similar thing could happen in the UK once the fines for PPI have finally come to an end midway through 2019. Meier thinks once that PPI hindrance goes away, we’ll see significant growth in shareholder pay-outs from the banks. His fund favours Barclays (BARC) currently.

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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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk