The political landscape is unsettled, but there are bigger forces than Brexit and investors should look beyond immediate clouds, argues Colin McLean.
Emotion rarely helps investors as fear can blind people to genuine opportunity. It can be hard to set aside concerns about politics and the economy, particularly when headlines focus on the problems.
However, political issues rarely persist, and many companies prosper even in the worst of times. Share investment should look past immediate clouds and focus on longer-term prospects.
Uncertainty over Britain’s future trading relationships worry investors, and over the past two years a lot of international money has been withdrawn. Brexit fears are combined with the possibility of a UK general election, and the risk that the trade war between the US and China might precipitate a slowdown in the global economy. However, does this mean investors ought to avoid the stockmarket till all is resolved?
Share investment is about companies rather than the overall economy. Many London-listed companies have international interests, and the lower value of the pound helps British exporters.
Certainly, tariffs and trade frictions are a negative for consumer businesses and industrial suppliers, but some will cope well with the challenge. Pricing may matter less where there is a strong competitive advantage, based on technology or close customer relationships.
The lower pound has encouraged some UK inflation that may prove helpful. In contrast, many Western developed economies are more exposed to the disruptive risk of deflation.
In the UK, real wages are growing, and this helps many domestic consumer businesses, ranging from travel and leisure, to retail and housebuilding. Individual sectors can make progress, despite negatives for the British economy as a whole.
Bigger forces at work
Brexit, trade friction and politics will drive economic change, but evolving consumer tastes and new tech are bigger forces.
In recent years, Britain’s high streets have been hollowed out, as activity moves online and new businesses emerge.
Such major global forces have little regard to politics or trade. Investors should focus more on the lifecycle of industries. New entrants can easily disrupt old businesses. Young consumers have little respect for traditional brands, and it is no longer the case that big, established companies are equated with safer investment.
General elections impact the stockmarket for a short period of time, but investors should note the long-term challenges facing older sectors such as healthcare, banking, and financial services.
Portfolios ought to include exposure to emerging sectors that have innovative business models. In the UK, these include legal services, investment platforms, student accommodation and industrial technology. The UK has some unique strengths that are likely to attract back international investors once there is more clarity on politics and Brexit.
Portfolios cannot be protected entirely against election risks, but they can be made more resilient. Investors should ensure that their stockmarket investment allows for a longer-term view – at least three to five years - allowing time for headlines to move on, and individual businesses to deliver results. UK-based global businesses and exporters will benefit if the pound is weak, and firms have had three years to adjust to the prospect of Brexit.
The political and economic landscape in the UK is unsettled, but this should not deter investors. Challenges lie ahead, but the businesses that are likely to handle this best may be those that are already winning against tough global competition.
Companies with high value-added in supplying major global customers may be better placed to overcome additional trade friction. Investors should look for businesses with a competitive edge and technological skill.
International concern over Britain’s future has opened up more attractive share prices. The UK has many listed businesses with global strengths, and it also has the additional benefit of a flexible economy.
Colin McLean is managing director of SVM Asset Management.