Q You said last year that the companies best placed to survive would be those able to generate cash and reinvest for future growth. Is that still the case?
Very much so. Companies more in control of their own destinies are better positioned, as they do not need to rely on the economic, political or regulatory environment to support them. It is still so uncertain for businesses with any UK exposure. Those that can take control of their own destinies, make positive investment decisions and are able to reinvest at a favourable rate of return can still flourish. However, for most companies, there is an obvious negative impact from the continuing political impasse.
Q When Brexit is done, will we start to see companies invest in projects that have been shelved for the past few years?
Every company I meet is very clear that the withdrawal agreement will not represent the end of this process. Until companies can properly understand the UK’s trading relationship with the rest of the world, they will find it very difficult to invest back into the UK. Would you invest in new machinery or a new factory if you are unsure what that relationship will be? Until a free trade agreement — or some other deal — is actually signed, I think business investment will remain muted.
Q Looking forward to 2020, what are the risks?
The most obvious risk to the UK economy is clearly the upcoming general election. If we were to get a hung parliament, uncertainty will persist and that will flow through into UK economic activity, markets and the currency. Having said that, the plain fact is that a Corbyn majority government would be very negative for the UK economy, regardless of one’s political view.
In terms of markets, only about a quarter of UK companies’ revenues come from the UK, so while the election result does matter, it isn’t the be-all and end-all for UK companies. The currency is more important in terms of market effects, which again will reflect whether we have certainty.
Q Do these risks also present opportunities?
Volatility in share prices has created opportunities to buy some stocks at attractive valuations this year. Take low-cost airline Ryanair. People are concerned about regulatory, political and also economic risk, given that Ryanair is a cyclical business. But in recent months, the company has been valued the same as the value of the planes on its balance sheet. From recent lows, we believe there is limited downside risk.
Q Heading into 2020, what are the key considerations for investors in the UK?
We are not out of the woods yet in terms of the generally slow economic conditions. It is difficult for companies to see top-line growth and margins remain under pressure. Also, companies have refinanced debt at low levels, but now that interest rates may be going back up that could create new challenges. Commodity prices have been rising too. Finally, while there are some opportunities to buy attractively priced companies, valuations generally still remain relatively full. So, we remain focused on companies that can generate cash and help themselves.
There are three major factors that we are watching closely: liquidity, currency and economic risk. I feel the UK market is relatively illiquid compared to history right now; it is more difficult to trade. From an economic perspective, there is the possibility of a UK recession, particularly if the consumer, which is such a large part of UK GDP, was to shut up shop. From a currency perspective, the range of outcomes for sterling against the US dollar is vast. Whichever way the GBP/USD rate goes, it will have an impact. Together, these three factors make me more nervous.
Q How are you positioning the portfolio in response?
Our portfolio has never been more large-cap and more neutral in terms of currency exposure, and we are not taking a lot of economic and cyclical risk unless the valuation protects us. This is a time for waiting and seeing. Once we can ascertain more clearly where we are, then we will have more confidence.
But we are long-term investors, we’re fully invested and I am very comfortable with the shares we own today. We are not defensively positioned. I think we have shown that our portfolio can be relatively all-weather.
All investments carry the risk of capital loss.