Global Investors Eye Brexit-Battered Stocks
On the face of it, UK equity prices hammered down by concerns over Brexit present a real bargain for overseas investors. But so far, few of them are piling in. Stock prices in the UK have risen about 5 per cent in dollar terms since the 2016 Brexit referendum, hugely underperforming the S&P 500’s near-40 per cent gain. That has left the FTSE 100 on a price/book ratio of 1.8 times, compared with 3.4 times for the blue-chip benchmark in the US.
At Papamarkou Wellner, Thorne Perkin, president of the $3.5bn-in-assets New York-based asset manager, has turned his eye back towards British businesses, despite still being underweight UK stocks relative to global benchmarks. “Brexit poses real risks to the UK economy but people often forget that many of the names that dominate the UK market are so global in nature,” he says. He cites Diageo, Unilever, Prudential and HSBC as examples of UK companies that “remain very healthy and strong” despite the uncertainty over Brexit.
But with the outcome of Brexit not much clearer now than a couple of years ago, many investors say that valuation gap is outweighed by the political uncertainties. “It’s very hard to trade this,” says Mohamed El-Erian, chief economic adviser at Allianz and former chief executive of bond firm Pimco. He sees the most likely development as a series of extensions to the date of Brexit. “Growth will be the major victim,” he says.
Robert Duggan, partner at New York-based SkyBridge Capital, which runs $9.4bn in assets, says he has given the UK a wide berth for those reasons. “We’re just finding better opportunities with more predictable return streams,” he says. But that could change, he adds, once the shape of Brexit becomes clearer. “People are waiting to position portfolios accordingly after the event rather than having large positions ahead of it.” Others, however, have begun to dip in their toes in recent months, believing some assets are temptingly priced — whatever happens.
Julien Scholnick, a portfolio manager at Pasadena-based Western Asset Management, which runs about $430bn in assets, said he has had no meaningful positioning in sterling or gilts since the 2016 Brexit referendum. However, late last year the group began putting on a small bet that the pound would rise, and in the first quarter of this year started a similar wager that short-term gilt prices would fall. Mr Scholnick believes the market is not discounting enough chance of a rise in interest rates, which he thinks could happen if a resolution is reached on a “soft” Brexit. “It begins to look a bit asymmetric,” he says, talking about the trade’s potential reward compared to its risk.Meanwhile, Fabrizio Quirighetti, head of multi-asset at SYZ Asset Management in Geneva, said he had viewed UK stocks and sterling as cheap over the past 12 months, but waited until mid-January to invest “as the odds of a hard or no-deal Brexit declined”.
But last week he trimmed that exposure to stocks and the pound, in the belief that the UK economy could suffer and “as we now have more concerns about general elections than the Brexit issue”.However, he believes he will buy back in later this year. “Both UK equities and sterling remain among the few assets in the ‘cheap’ camp,” he adds. Nevertheless, foreign investor sentiment towards UK stocks continues to be nervous.Outcomes to political situations “are hard to get right”, said Western’s Mr Scholnick. “And even if you knew what the outcome would be, working out the market reaction is challenging.”
FT Reporter ~ Nikou Asgari, April 8, 2019
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