If you’re investing online into a stocks and shares ISA or SIPP, there’s a good chance you’ve been selling off your exposure to the UK faster than that guy in the office has been dumping his hoard of bitcoin and ether for whatever he can get with it. Or at the very least your more recent allocations have been diversifying out of UK equities.
Asia’s a good bet at the moment, maybe you’ve picked up a Japanese or broader Asian fund? Not a bad call, as we’ll look at tomorrow. But..and here me out…maybe you should be investing in the UK right now instead of making like a big mouse on a listing ship.
Of course, contrary investing is not being invented right now. It’s a well-worn strategy that has been demonstrated to be effective, in the right circumstances. But there is of course a fine line between contrary investing and following a downward trend like a lemming approaching a cliff edge. Contrary investing is about unearthing unloved shares after the factors that have dragged them down being turned around but before the wider market has paid attention. It’s not about grabbing onto the coattails of a steep downwards trend, right?
With Theresa May embattled but hanging on for dear life, a deal with the EU finally reached but looking like it will be rejected by parliament, the pound and bond yields in freefall and UK-economy focused equities tanking earlier this week perhaps investing in the UK now would be taking the contrary approach to investing online one step too far?
But there might be a happy medium. It’s well documented that many of the FTSE 100’s London-listed large caps earn a large majority of their revenues abroad, in other currencies and in other economies. So the fact that they happen to be listed in the UK and often, though not always, originally founded in this country, has little bearing on their internationally diversified performance.
In fact, it can help as revenues generated in other currencies add up to more pounds on their balance sheets when results are reported. Professional analysts and stock pickers are of course not fooled by that and look at currency-adjusted results. But there is mild benefit and the FTSE 100 is probably somewhat undervalued at the moment, having been caught up in the negativity towards the UK. But these are not hidden gems. Everyone knows that so while there may be a bounce once Brexit negativity calms down, it is unlikely to be a huge one.
It’s also probably wise to be wary of UK economy-centric stocks. Particularly those from cyclical sectors that represent more cyclical and ‘feel good’ spending that can easily be delayed. But at the same time, the extent of the recent sell-off does seem to have been overdone. A recent Telegraph column highlights that the run on ‘banks, housebuilders and leisure stocks may have overcooked it’.
The argument why UK stocks in these sectors may now represent good value is the simple one that human psychology tends to overegg both optimism and pessimism. Things rarely turn out as well or badly as we expect. Take the financial sector. Following the 2008-09 crisis it has been well capitalised and regularly ‘stress tested’. Even the worst possible no deal Brexit scenario is unlikely to lead to banks needing to be bailed out or re-capitalised in any significant way.
Generally speaking, unless you expect post-Brexit Britain to genuinely go to the dogs, UK stocks are currently cheap compared to comparable peers on other markets. A good comparison would be sterling’s withdrawal from the ERM in 1992. The day was even dubbed ‘Black Wednesday’. But anyone who had invested in the FTSE 250 after that would have seen their investment gain 800% over the 26 years after. That’s an average annual return of over 30%.
Pretty good for any portfolio. The fact is that the extent to which an investment is successful is hugely reliant on the price originally paid. Prices that can be paid now are very good and may well get better. So unless you have lost all hope for post-Brexit Britain, now and over the next few months might well offer the best FTSE 250 returns for a generation.