In this 2-part series, City A.M. asked UK-focused fund managers what they make of post-Brexit trade arrangements, the impact of three lockdowns and the long-term outlook for the UK’s investment community.
Yesterday, in part 1, the investment managers focused on the UK-EU deal and which sectors and companies may become the winners and losers from the trade agreement.
Today, fund managers discuss how the third lockdown has affected businesses compared to the previous two and they zoom in on the investment space in the long-term.
Despite the Brexit trade deal coming into force at the beginning of the year, the investment community was dealt another blow when the government imposed a third national lockdown earlier this month.
Its impact, however, may not be so severe as the first two, argued David Smith, fund manager of the Henderson High Income Trust.
“The companies in the portfolio that are most impacted from lockdowns have all generally strengthened their balance sheets and reduced their cash burn prior to this lockdown so that they are able to emerge in a stronger position relative to competition in a recovery,” Smith told City A.M.
He pointed at UK-based publisher and events business Informa, saying it raised equity, cut costs and refinanced its debt so that even if the company couldn’t run physical events outside of China in 2021, they would still be able to generate positive cash flow from the rest of the business.
“This puts the company in a good position to not only survive in the short term but thrive in the longer term given there is a credible path to recovery now there are effective vaccines,” Smith said.
In fact, Guy Anderson, portfolio manager of The Mercantile Investment Trust, said that many of his holdings found themselves “relative beneficiaries” of the lockdown environment, including ‘stay-at-home winners’ like Pets at Home, the pet products retailer, and B&M, the discounter.
“But we also hold stocks which are poised to benefit from a Covid-recovery in the travel and leisure sector. Given lessons from previous lockdowns, most companies are now familiar with the necessary operational protocols and, in many cases, better positioned,” Anderson said.
For example, homewares retailer Dunelm has levelled up its multi-channel proposition both prior to and during the pandemic, he added.
“Of course, further lockdowns are disappointing and a drain on the UK economy but some sectors, such as construction, are less impacted than previously, and for some companies lockdowns may even be helpful,” said Abby Glennie, investment director of Standard Life UK Smaller Companies Trust, as she singled out block paving firm Marshalls.
Glennie thinks the disparity between winners and losers in certain sectors will continue to accelerate, with retail being a prime example.
“Those who went into Covid with good online propositions are well positioned to increase market share,” she said, pointing at Hotel Chocolat, Dunelm and AO World.
“But clearly many businesses still have work to do to adapt to new working environments and operate efficiently,” Glennie stressed.
Outlook for UK equities
Finally, the City-based investment managers looked at the UK stock market post-Brexit.
According to Alex Wright, portfolio manager of Fidelity Special Values, the stock market and particularly UK domestic-facing stocks look “very attractively priced, with many also having strong fundamentals.”
“While the new more transmissible virus variant is a near-term concern, the body of evidence suggests it is treatable with existing vaccines. This should not change the course of the pandemic, which with three vaccines approved should be abating by Easter or Summer in the developed world,” Wright said.
“Thus I am making very few changes to the portfolio, simply adding to some domestic and virus-exposed names at the margin, where there is liquidity,” he shared.
Henderson’s Smith anticipates a year with relative less worries may have just begun. He stressed that equity markets “hate uncertainty” and there has been a lot to worry about over the last few years: Brexit, the general election, the US presidential election, US-China trade relations, slowing global economic growth and more recently the pandemic.
“This year there is less uncertainty and with effective vaccines being rolled out there is a credible path to life returning to some form of normality sooner rather than later. We also have a Brexit trade deal and a new US President,” Smith said.
He pointed out that the global economy has moved from late cycle to early cycle in the space of six months via a pandemic-induced severe recession.
“With strong global economic growth expected as the recovery from the pandemic comes through and continued monetary and fiscal support from governments, I believe the backdrop is positive for UK equities especially given the starting valuation is attractive both in absolute terms and relative to other developed markets,” Smith noted.
Margaret Lawson, lead manager of SVM UK Emerging Fund, is also positive about 2021. She expects a sharp UK economic recovery as the year progresses and the lockdown unwinds.
“Vaccination will drive this increasing confidence. Some government stimulus will continue, there is a need for many companies to replenish inventory and make further capital investment, and consumers who have been able to continue working have higher levels of savings,” she said.
This may trigger pent-up consumer demand for travel and hospitality and a sharp recovery, with corporate buyers to be the first to spot the value in UK-listed companies.
“I expect more M&A activity this year. I think a feature of further bids will be UK-listed companies with attractive overseas assets,” Lawson concluded.