Silver linings to the Brexit cloud and how to profit

silver-lining-sunrise

Fears of a property meltdown have intensified over the past couple of days, on back of half-a-dozen commercial property funds taking measures to prevent investors from getting their money back.

The move to suspend trading, led by Standard Life earlier this week, was widely covered by news outlets.

In normal circumstances a property fund suspending trading would only make the business pages - but this time around, given that this is the first sign the property market may be adversely impacted by the Brexit vote, the story has had greater prominence.

Since last month's Brexit vote there have been various predictions from economists that house prices nationwide could fall 10 per cent, and further in London. Investors however prefer to base their decisions on cold hard evidence.

SILVER LININGS

That is why since Standard Life moved to suspend its £2.9 billion UK real estate fund there has been a domino effect, with other funds also announcing suspensions as investors acted on impulse in a desperate bid to get their money back.

Prior to the fund suspensions, investors had only had one housebuilder report since Brexit - from Persimmon, which said it was too early to judge the impact Brexit will have on the housing market.

At such times of protracted and widely broadcast uncertainty, it is natural for investors to become nervous about all of their investments, not only on the outlook for property.

When markets are volatile, as they indeed have been since the Brexit vote, it is hard to resist selling into the panic. Since 24 June the FTSE 250 index, which is much more domestically focused versus the FTSE 100, is down 8 per cent.

While the FTSE 100 has won back its losses, seeing big companies fall heavily, with certain banks and housebuilders losing 25 per cent of their value in the first week post-Brexit will have driven some investors to hit the sell button.

But despite the negative fallout from the Brexit vote, there are silver linings to profit from.

PROPERTY

The first is the fact that while the open-ended funds have been hard hit by pressure from worried investors, commercial property investment trusts - which are not under the same pressure to react defensively when investors take fright - are on huge discounts and offering juicy yields.

The Investment Association's property sector average discount currently stands at 14 per cent, but a number of the large funds are trading in excess of 20 per cent discount, including UK Commercial Property (22 per cent) and F&C Commercial Property (25 per cent).

It may seem counterintuitive, given the open-ended fund suspensions, but two respected brokers, Numis and Winterflood, have slapped a 'buy' recommendation on the sector. Both have tipped F&C Commercial Property, yielding 5.9 per cent.

Numis noted the high yield on offer will continue to draw in income-hungry investors, thus supporting the share price.

Ewan Lovett-Turner, director of investment companies research, at Numis, explains: 'The combination of modest leverage and a lack of redemption pressures mean that UK property trusts do not need to sell assets, unlike some of their open-ended peers.

'Nevertheless, discounts/premiums of commercial property trusts tend to be correlated to investor flows and after a few years of increasing allocations to the property sector, investors are now withdrawing capital.

'It is difficult to know exactly where discounts will bottom, and in the short term it is difficult to swim against the tide of open-ended outflows which are likely to put continued pressure on capital values and discounts.

'Importantly, though, the fundamentals are different from 2008, and we believe that discounts in excess of 20 per cent represent a buying opportunity given the yield support.'

EQUITIES

While on the day the Brexit result was announced stock markets across the globe tanked, a week later Britain's FTSE 100 index had regained its losses, and then some.

One of the reasons why this played out, although the speed at which it happened surprised virtually all market commentators, was because there is a silver lining behind sterling's heavy deprecation, down over 10 per cent since Brexit against the US dollar.

A cheaper pound is good news for internationally facing domestic companies, whose exports are made considerably more competitive by weaker sterling, thus boosting earnings.

Many of these business are 'quality defensive equities', and even in these uncertain times and a lower-growth world various experts are tipping this part of the market to shine.

Certain fund managers with defensive investment styles tap into these 'quality names', which are typically armed with big brands and intellectual property, such as a unique product or service, which is difficult for competitors to replicate.

Jason Hollands names JO Hambro UK Opportunities and Liontrust Special Situations as his two favourities to play the trend. In the global fund arena Ben Willis of Whitechurch Securities tips Fundsmith Equity, managed by city veteran Terry Smith, as well as Newton Global Income.

'In light of Brexit we see investors retrenching due to the ongoing uncertainty and lack of clarity for global markets in the near term,' says Willis.

'As such, we see companies that despite trading on high multiples are going to remain in demand due to their visible earnings growth. Our view is that the weakness of sterling and an uncertain outlook for Europe means that value areas in these markets will come under pressure.'

At wealth manager Canaccord Genuity, deputy chief investment officer Richard Champion suggests there may be good opportunities for income seekers prepared to buy single blue-chips. He points to the likes of Whitbread and BT, shares in both of which have seen sharp falls since the EU vote.

Although he does not expect the wider dividend story to improve this year, anticipating ‘widespread cuts among firms with less well-covered dividends’, Champion explains that the fall in the share price of such companies means that dividend yields are now more attractive for new buyers. Moreover, in some cases there are opportunities for dividend growth over coming years.

‘BT says it intends to grow its dividend at double-digit rates,’ says Champion. ‘It saw a heavy fall after the vote because of its recent acquisition of EE and the amount of UK business it does, yet in a conference call it said it expects almost zero impact on business as a result of Brexit. We see that as a good opportunity.’

Canaccord Genuity also believes some housebuilders may have been oversold, having fallen around 40 per cent since the start of the year. ‘They are still good dividend payers and they don’t have the heavy debt they had in 2008-09,’ comments Champion.


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