This article is part of Morningstar's "Perspectives" series, written by third-party contributors.
As 2018 draws to a close, stock markets round the world are falling, but for different reasons. The US big-tech FAANG stocks are collapsing as the realities of slower growth, tighter regulation, and higher taxes become clearer to investors.
The FAANGs are coming from a bad place, where unrealistically high expectations were priced in. China’s stock market is falling because growth is slowing there, and the trade war with the US is intensifying. Here in the UK, the already cheap stock market declines further as political uncertainty surrounding Brexit reaches its zenith.
UK Aversion Overdone?
Investor revulsion towards UK companies serving the domestic market is reaching an extreme level. And this trend may not have fully run its course just yet. The UK economy continues to perform surprisingly well, with employment at record levels, low unemployment, and wages growing at their fastest rate for three years.
The amount of consumer debt is lower than it was ten years ago, while assets in the personal sector have risen substantially – facts often overlooked by pessimistic commentators.
Overseas holdings look cheap too – Asian markets in particular are inexpensive, both relative to history, and to the rest of the world, which is all the more remarkable in view of the secular growth which continues in most of the region.
Time To Buy Back In?
Last year, we had to sell our growth stocks – companies such as Renishaw (RSW), XP Power (XPP) and Alliance Pharma (APH), because their prices simply ran away from us. In the last few weeks the share prices of these companies have collapsed, bringing them nearer levels where we would be happy to own them again. Companies such as Cranswick, Hilton Foods and even Halma, which we have not been able to own for many years, might also become investable again too.
We have used recent weakness to reduce our holdings in the ‘steady eddies’ and add to areas where we see real growth. If each holding in the current portfolio were to return to its highest level of the last twelve months, the fund price would rise by 27% from its current level, and we believe that many of our holdings are capable of doing a lot more than that.
Many of the cash-flows that support our dividend are contractual in nature, such as rent, and the payment of utility bills. Some income derives from necessary infrastructure maintenance and investment, and some from everyday activities such as grocery shopping and drinking in pubs.
Students of history will remember that investor returns in years ending with an 8 have been disappointing – 1988, 1998, and in particular 2008 – whereas years ending in a 9 have been vintage ones. This pattern has held true in 2018, and we do not expect it to be broken in 2019.
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