BY NIGEL KENNETT, SENIOR FUND MANAGER, UK EQUITIES
The end of 2018 was rocky for UK equities thanks to the ongoing Brexit deadlock. Whilst more domestic sectors, such as retailers, have been amongst the weakest performers, the overall UK Equity market remains unloved. UK Equity Fund outflows were aggressively negative during 2018 and Global Funds continue to be generally considerably underweight the UK. As a result, UK equities are valued at a notable discount; on Institutional Brokers’ Estimate System’s (IBES) consensus price-earnings basis for 2019 the discount is circa 14% to Global Equities, 6% to European Equities, and 24% to US Equities. This is also reflected in the UK’s high dividend yield of 4.8% for 2019 and vast premium to the 10-year bond rate of just 1.16%. The main reason for this disparity undoubtedly roots from the significant uncertainty around how the UK leaves the European Union.
We have retained our exposure in under-valued large caps that have an international focus. We are overweight BP and this preference reflects a valuation discount of its sum-of-the-parts net asset value relative to Shell. We also own a small position in exploration group, Tullow Oil. Other overseas earnings companies that are more secure from Brexit and good performers for the Fund include: Relx (global provider of information and analytics for professional and business customers across industries); the mining sector with our main position being BHP; GSK (GlaxoSmithKline); global consumer staples giant, Unilever; Ashtead (most of the company’s profit comes from the US).
We are managing our industry weightings carefully given the unknown outcome of Brexit. However, we are also staying true to our beliefs of investing behind quality companies where it sees value for the medium term. This includes exposure to several companies with a higher exposure to UK earnings where we believe valuations may be overly discounting the negative Brexit sentiment. We continue to believe in a low growth, low inflationary and therefore low interest rate world, as we have for some time despite the market’s aggressive sell-off and style rotation in Q4 of 2018. The markets calmed down in Q1 2019 and the Fund’s performance improved.
Despite the economic and political uncertainty clouding the UK, we believe the main areas of growth can be found in more niche situations invariably found in the FTSE Mid-250 Index and the lower end of the FTSE100 Index. Nevertheless, growth can even be found in retailing. JD Sports, for example, is performing well as it is focussed on structural growth in the “athleisure” market and growth in the consumer’s appetite for sports leisure. The travel division of WH Smith is also an attractive growth business. Although major uncertainties lie ahead, valuations of UK Equities appear very attractive and are exceptionally under-owned leading to our cautiously optimistic view for 2019.
Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments can fluctuate. Currency fluctuations can also affect performance.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors. No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Investments. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s).
Canada Life Investments is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
CLI01346 Expiry on 31 March 2019