Is Brexit uncertainty laying the foundations for future outperformance from UK equities?



UK equity and bond Portfolio Manager Stephen Payne highlights the importance of stock selection and risk management during a period of significant uncertainty for the UK, in the lead-up to Brexit. He also covers the potential for UK market outperformance as we move further into 2019.

​What are the key themes likely to shape markets in 2019?

It is difficult to objectively look beyond the short-term impact of Brexit, whatever deal the UK manages to negotiate with its former partners. At a surface level, fraught Brexit negotiations, led by a fragile UK government with a marginal majority, have undermined confidence in UK-listed companies and prospects for the economy. However, the most pertinent question facing investors is how to harness the inevitable short-term disruption to generate long-term sustainable returns. We see the current unpopularity of UK equities as a great window of opportunity for contrarian investors to add exposure at relatively attractive prices, with a strong emphasis on stock selection.

Where do you see the most important opportunities and risks within the different asset classes?

The UK market is home to many global businesses, providing long-term investors with exposure to growth dynamics around the world at what look like relatively attractive share price valuations. But the UK also has many domestically focused firms, many of which are currently trading at deeply discounted valuations. As the fog of Brexit lifts, there is room for these discounts to unwind, potentially driving strong relative outperformance from the UK market.

Bonds have an important role to play in a cautiously positioned strategy, acting as a useful foil to the inherent volatility in equity markets. We continue to manage risk, where possible, holding shorter dated bonds than the average in the market (being ‘short duration’), playing close attention to credit risk, and guarding against any rise in expectations for inflation. Given the current level of geopolitical uncertainty, we have reduced exposure to the lower quality ‘high yield’ end of the market, where the potential for greater rewards is balanced with additional risk.

With interest rates rising and asset markets more volatile, the merits of cash as a defensive asset become more obvious. It serves to help preserve investors’ capital and provides the wherewithal to step into markets when opportunities arrive.

How have your experiences in 2018 shifted your approach or outlook for 2019?

We regard recent market uncertainty as a healthy correction, rather than the beginnings of a more sustained ‘bear’ market. However, the question for many investors is how close we are to the end of the current economic cycle. The economic backdrop has seen leading indicators lose momentum of late but they remain at clearly positive levels. US interest rate rises have put a squeeze on global liquidity, but they reflect what is a strong underlying US economy. At a corporate level, earnings growth remains strong, but higher input costs (the costs associated with producing a product or service – including wages) are starting to put pressure on profit margins in some areas. At this late stage in the economic cycle we believe it pays to be careful and selective in risk exposures, although there are still opportunities for healthy returns.

Which themes have the potential to redirect markets in 2019? Download our Infographic to find out


Market correction: A fall in the market that is generally defined as a fall of ten per cent of more in value.

Credit risk: The risk that a borrower will default on its contractual obligations to investors, by failing to make the required debt payments.

Bear market: A stock market environment in which share prices fall over a sustained period.

Economic cycle: The natural fluctuation of the economy between periods of growth and contraction.

Global liquidity: The availability of financing in global financial markets.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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