What lies ahead for the UK? Fear of the unknown has driven some investors to cut UK exposure. And many international investors and private clients have simply decided to wait and see, delaying further commitment. But, could much of the risk now be priced in? Emotion is rarely helpful in investment decisions.
Stockmarket investors should remember that they are buying companies, not economies. Many London-listed companies have dynamic management, clear strategic focus, and a lot of control over their own destiny. Time spent with company managements may be a better guide than paying attention to politicians and highly charged headlines.
Investors are affected too much by mood; it is hard to separate feelings from fact. For two years UK sentiment has been dominated by Brexit, shedding gloom on the London market. Even as the EU project itself is challenged by politics in Italy and Germany - to international investors, it seems it is only the UK that is at risk. The financial sector, in particular, appears at the centre of this uncertainty, with constant talk of staff relocations to other European centres. Investors can find it hard to gain perspective.
Against this background, any good news is heavily discounted, even if it does make it to the front page. But opportunity lies in what is neglected. Amidst the pessimism, London’s success and its leadership in Europe’s technology finance is being overlooked. And, over the years, the UK has proved a highly flexible economy; embracing technology, open to restructuring and M&A, and with a mobile workforce. Britain has strengths in science, services and design, with many world-leading businesses. It is a measure of the polarisation of debate that even talk of Britain’s strengths seems political. But little of what grabs public attention currently is really useful for investment decisions.
Even out of Europe, the UK stockmarket will be one that attracts international investors, both passive and active. Just as Japan is in Asia but often allocated separately as stockmarket exposure, the UK will offer a different take on Europe with its own monetary policy and currency. More global than its region, active investment is a search for differentiation; unrecognised distinctive competence. The UK market offers that.
Many UK mid-cap businesses have identified growth niches with genuine competitive edge. And, more of these businesses are benefiting from major secular trends, as technology and the change in consumer demands challenge traditional business models. Technology is also enabling some companies to make their businesses more scalable and employ less capital. We view a return to positive real wage growth as a positive for our portfolios.
Meetings with portfolio companies to date show encouraging progress and further opportunity in their markets. SVM’s emphasis is on companies with self-help opportunities in organic growth, restructuring or cost-cutting.