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

27/11/2018

Download

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



Glossary:

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.

For promotional purposes.


Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Cautious Managed Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Some or all of the annual management charge is taken from capital. This may constrain potential for capital growth.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The value of a bond or money market instrument may fall if the financial health of the issuer weakens, or the market believes it may weaken. This risk is greater the lower the credit quality of the bond.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise. This risk is generally greater the longer the maturity of a bond investment.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Share

Important message