Luke Newman, portfolio manager on the UK Absolute Return strategy, gives his thoughts on UK markets as we move further into 2020, outlining key issues to note – both macroeconomic and political – that are likely to have an impact on share prices in the months ahead.
Clarity over the direction of Brexit has created a big change - making the UK equity market investable for the first time in a number of years.
The end of 2019 saw a very sudden and very savage rotation into lower valued, more cyclical areas of the market. The disparity in pricing between growth and value remains a feature of
all capital markets, which will need to be managed very carefully.
While the UK election brought some clarity over the short-term direction of Brexit, political
risk remains heightened, with UK/EU negotiations ongoing and a potentially contentious US election ahead. The focus remains on ensuring that appropriate positioning is in place to
Which macroeconomic themes do you think will be most relevant in 2020?
Looking forward to 2020 our primary focus is on individual shares and the opportunity that they can provide. But from a thematic point of view, two really jump out. The first is the UK. We have not been apologists for the investment environment in the UK, but we can see a lot of clarity now with the first majority government for a number of years, and at least some hints of a way forward, in terms of Brexit. This has created a big change in our home market; it has made the UK equity market investable again for the first time in a number of years.
Secondly, from a thematic point of view, the importance of operating within our ESG framework can’t be understated. This isn’t new for the strategy, but what we’ve seen in recent years is the importance of ESG-orientated investors – and money flows – becoming increasingly important in driving individual share prices. The flexibility of having a long and a short book allows us to harness this theme for the benefit of our investors, and that is something we expect to see more of in 2020 than we have, even over the last few years.
Where do you see risks and opportunities for long/short investors in 2020?
Risks for an equity investor – even a long/short one – are a permanent feature. So we can see risks from a micro and a macro level going forward. The benefit that we have though, is within the flexibility of the strategy itself, operating with a stock-specific long and short book, plus a more fundamental long-term ‘Core’ book, augmented by a very flexible, trading-orientated ‘Tactical’ book. That gives us the toolkit to hopefully manage those macro and micro risks and deliver a consistent, stable stream of absolute returns for our investors.
What surprises did 2019 present?
2019 provided a lot of surprises, as ever, particularly politically. Domestically within the UK, huge amounts of political uncertainty eventually gave way to a more positive future – in terms of certainty, at least – via the general election. From a trading point of view that provided opportunities both into and out of that event, which we were able to capitalise on within the strategy.
Other major surprises occurred through the summer. Thematically within markets, there has been a huge bias towards growth-orientated investments and equities within markets: compounding, high-quality entities and companies performing very well. We did see in August and October, a very sudden and very savage rotation into lower valued areas of the market – more industrial and cyclical in nature.
Which market/economic indicators are the most important for you?
There are two factors that we are watching extremely closely when we look forward to 2020. Politically, again, we are facing a US presidential election. This will increase in importance as we move forward throughout the year. We are already thinking about trading blueprints, depending on various scenarios, so plenty of work to do ahead of time. In a strategy that is focused on preserving capital, and delivering that steady absolute return, it is important that we have the appropriate positioning in place to limit any volatility that we see.
Secondly, returning to a feature of 2019, we have seen again an extreme setup between growth and value within markets – all capital markets. And we are seeing that across the world. We need to manage very carefully against any uptick in inflation and this seems more pertinent than ever. We have seen central banks generally operating with a lot of stimulus in place. Could this be augmented by western governments beginning to utilise fiscal stimulus tools a little bit more, in an attempt to stimulate labour inflation (and general inflation) back into the economy? If that were successful, it would cause a big shift within equity markets I would think, and that would require managing. For example, our short position within banks globally would be the sort of area we would be reviewing were there any evidence of inflation that began to manifest.
So, plenty to monitor, plenty to watch and we are expecting a very active year of trading and positioning that hopefully can deliver that positive absolute return for our investors again.
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