Economic progress combined with negative sentiment means the UK is a land of opportunity for investors, says Alex Neilson.
Chancellor Philip Hammond’s Spring Statement confirms that, despite Brexit uncertainty, the strength of the underlying economy means that there are great opportunities in the UK for equity investors.
British stocks have, over the past 30 years, been the darling of asset managers around the world. Investors in the UK benefit from a business-friendly environment, minimal regulation, good corporate governance and dividends paid in pounds. They also get automatic diversification thanks to the broad range of globally facing companies in the FTSE 100.
Despite these almost unrivalled fundamentals, UK equities continue to struggle under the spectre of Brexit. Uncertainty surrounding the UK’s departure from the European Union has driven UK equities to levels not seen for six years, even as the UK economy has improved, with real wages beginning to grow and record high employment.
Such favourable underlying conditions, combined with prevailing negative sentiment, means that UK stocks offer some of the best value equity investments in the world, especially for long-term investors.
If the government can wrangle a soft Brexit (as Hammond rightly says is likely) the pound should appreciate, thereby reducing operating costs for domestically facing UK stocks.
As well as the “Deal Dividend” for public services mentioned by Hammond, smaller and mid-cap companies – companies more reliant on UK consumers – will likely surge in value. We can also expect a boost to consumer confidence.
When it comes to UK equities, there are of course two sides to the Brexit story. FTSE 100 companies with large overseas operations have benefited from the falling value of sterling.
Any boost to the pound provided by the hammering out of a Brexit deal may have an adverse impact on the UK’s largest companies. Still, in the long run, these businesses will also benefit from an end to uncertainty.
Business is all about meeting challenges. Long-term investors would do well to remember that British companies, with their solid fundamentals and good corporate governance, are exceptionally well placed to weather the Brexit storm.
For this reason, UK equities are an excellent opportunity despite, or even because of, Brexit.
Alex Neilson is investment manager at Investec Click & Invest.