Focus on Valuations, Not Boris and Hard Brexit

VIDEO: Morningstar portfolio specialist Keith Speck tells senior editor Holly Black that a new Prime Minister hasn't dampened his outlook on the UK 

Holly Black 31 July, 2019 | 11:04AM
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Holly Black: Welcome to the Morningstar series, "Ask the Expert." I'm Holly Black. With me today is Keith Speck. He is a Portfolio Specialist at Morningstar. Hello.

Keith Speck: Hello, Holly.

Black: So, you're here to talk to us about the UK We've got a new Prime Minister. He's been in position for about a week. Does that change how you feel about the UK?

Speck: No. Not really. Boris has come in and he's stated that we are going to be leaving the European Union come what may by the 31st of October. The range of outcomes for Brexit haven't changed. It could be no deal. It could be a deal. It could be an orderly or a disorderly Brexit. What has changed potentially are the probabilities of those. So, a no deal Brexit has increased in probability whilst no Brexit at all has certainly declined. This has been quickly priced into markets however, as we've seen with the reaction of the bond and currency markets over the last few days. Political outcomes are notoriously difficult to predict. And as such, we would really recommend putting them to one side and rather focus on valuations. So, the way we think about investing, we're fundamental long-term valuation-driven investors and we apply that discipline looking at across the range of investments that we review.

Black: But obviously, all this uncertainty has put a cloud over the UK for investors over the last couple of years. Something that's often said to allay people's concerns is, well, the U.K. economy and the UK political scene is not the UK stock market. Is that something that you guys think?

Speck: Yeah, absolutely right. The UK stock market isn't a reflection of the UK economy. If we look at the makeup of the FTSE 100, most of the companies there are multinational and around 70% of their earnings would be derived from overseas. And even looking further down the market cap scale, we would see around 40% of earnings coming from overseas. So, no, clearly, we don't view the UK stock market as the UK economy.

Black: So, you rate your conviction on regions on a scale low to high and you've got the U.K. on medium at the moment. How does that compare to other areas?

Speck: Yeah. If we look at the strength we've seen in markets over recent years, that's actually led to valuations, in many cases, looking on the expensive side. That's not so for the UK equity market. And actually, by carrying out the valuation work that we do, it ranks as one of the more attractive opportunities. And particularly, when we look at it against other equity regions, a lot of areas that we are looking at, at the moment, would rank more in the low conviction area. So, gilts would be a good example of that and the US equity market where valuations to us are looking extremely stretched. So, yeah, we're comfortable that UK valuations offer a reasonable opportunity at this point.

Black: Obviously, cheap valuations tends to indicate there's risks and I suppose the biggest one potentially is a hard Brexit. Is that something you are more concerned about since Boris came in?

Speck: Clearly, the probability of a hard Brexit has increased. But when we view the range of potential outcomes and looking at what's priced in the UK market at the moment, we do see a reasonable opportunity for investors with a longer-term view. There's a lot of pessimism around the UK equity market at the moment. If we look at fund flows into UK equities, we've seen monthly outflows each month since April of 2017 up until June of this year. So, a lot of pessimism around, which makes sort of contrarian thinker a longer-term thinker, leads to an attractive opportunity in that market.

Black: Thank you so much for your time.

Speck: Thank you, Holly.

Black: Thanks for joining us.

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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Holly Black  is Senior Editor,


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