Your portfolio
The best time to invest is “when there is blood on the streets” – but
Daniel Lanyon says waiting for a full-blown Brexit disaster could be
leaving it too late
There will be blood
L
et’s cancel Brexit. No deal,
no problem. It’s time for a
second referendum. Sure’s
sure, at least one of those
statements really irritated you. What
is also certain, whatever your political
stripes, is that about as much bad
news as possible is already baked into
the UK equity market, making for a
possible rare contrarian opportunity.
UK equities are under-owned due to
Brexit uncertainty and the wide gamut
of outcomes that are still possible.
There is clearly cause for concern as
29 March draws closer but negative
sentiment can often bring about classic
“contrarian” plays when valuations
reach a level uncoupled from the risks.
As the old saying goes, the best time
to buy is when there is blood on the
streets and, while it hopefully won’t
come to that, a political and economic
inflection point may not be far off for
those in both Westminster and the City.
Negative sentiment towards UK
equities is apparent from every type
of valuation metric. On a P/E basis,
FE TRUSTNET
[ CONTRARIAN PLAY ]
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the FTSE All Share is trading at about
12 times prospective earnings while
its yield is 4.7 per cent – well above its
long-term average. These numbers,
contrasted with global equity markets
such as the MSCI World, make the UK
appear very attractively valued.
We have seen a softer Brexit
direction too, since Theresa May’s
bill was voted down in January and
a range of amendments were tabled
by MPs, which tilted towards a lower
probability of a no-deal outcome – this
was evident by the rally in sterling from
$1.25 to $1.32 since mid-December.
There may be much worse to
The question for
stockpickers is how much
potential bad news is priced
in and at what level of
valuation do some of the
bombed-out areas become
attractive?
come of course, but the question for
stockpickers is how much potential
bad news is priced in and at what level
of valuation do some of the bombed-
out areas become attractive? At
present, most investors are avoiding
this area, however experienced active
managers with longer-term horizons
have begun to dip their toes back into
domestic waters.
Colin Morton, manager of the
Franklin UK Equity Income fund,
says there is a strong contrarian
opportunity as growing short-termism
contributes to an emerging valuation
gap: “Given the challenging market
backdrop, the underweights on the UK
are some of the most extreme we have
4.7%
– curr
en
UK ma t dividend y
ield of
rket, c
ompa
3.7% f
r
e
d
rom it
s histo with
r
ical
averag
e
trustnet.com