Bill Jamieson: Stick with UK stock, unless you're a Braveheart

Mel Gibson as William Wallace in the 1995 film Braveheart. Picture: PA

After the EU referendum vote, share prices in domestic focused companies plunged as the pound tumbled and analysts feared a drying up of inward investment. Growth measured by GDP has been lacklustre.

On the continent fears that the fragile Italian coalition could unite around a Euro zone defying programme of tax cuts and spending rises could unsettle continental markets have also worked to keep investors away.

Perfect conditions, therefore, for the contrarians and bravehearts to come to the fore. Prominent among them is long-time favourite of this column, Thomas Moore, manager of the £1.4 billion Standard Life Investments UK Equity Income Unconstrained fund and the £245 million Standard Life Equity Income Investment Trust.

These took a hit in the immediate aftermath of the referendum vote to leave the UK. In the two weeks following the referendum, shares in the trust fell by more than 10 per cent, and the unconstrained fund was down by more than eight per cent.

But since then, Moore has mounted a recovery, with shares in the trust up 35 per cent from that low and his fund up by almost a third. Over the last 12 months the unconstrained fund is showing a gain of 10.6 per cent, approximately double the Investment Association UK equity income sector over this period.

Moore is a proud defender of his UK focus, happy, he told the CityWire website in an interview at the weekend to “shout it from the rooftops”. Here he may be flying a flag for the UK equity income sector as whole. It has been buried since the referendum vote beneath the fund manager consensus to avoid the UK and look to global – and emerging market funds in particular – for performance. Indeed, investment in the UK has been treated as a ‘no-go’ area.

However, dismal though the UK’s economic performance has been in recent quarters, he is confident of a rebound. In recent weeks the service sector, retail sales and business confidence readings from the CBI and others have been pointing to an upturn from the weather-hit and miserable first three months of 2018.

So, while other fund managers were selling down shares in UK companies, Moore has been doubling up on some of those worst hit by the Brexit vote. He told Citywire’s Daniel Grote he had singled out brickmaker Ibstock where the shares tumbled 35 per cent on the vote, before doubling in price over the next year. ‘It went from hated to loved in quite short order,’ he said. Travel group TUI and soft drinks maker Britvic are others where he has been able to take profits from a recovery – and all this under the shroud of concerns over the government’s handling of the Brexit negotiations and the prolonged uncertainty over the final outcome. This has been a depressing influence on business confidence.

But a big rebound could occur once some of this uncertainty begins to lift, and meanwhile Moore has not shied away from some of the untouchable areas of the UK market – retail or example. He singles out furniture retailer DFS. While its fortunes are tied to those of the wider economy. Shares in DFS, he argues, have been unfairly lumped with others in the sector such as Mothercare and Carpetright, as it does not have the same vulnerability to Amazon.

Italy worries

But an especially strong Braveheart may be needed to stick with funds specialising in European equities. The immediate threat of an Italian showdown with the Eurozone may have passed – the domestic stock market tumbled 10 per cent at one point and government bond yields jumped before stabilising the past week. But opinion is deeply divided on prospects from here.

GAM investment director and FE Alpha Manager Niall Gallagher doesn’t believe the political turbulence in Italy will have an impact on the other eurozone economies outside of the banking sector and Italy itself. “While we may experience several months of ‘noise’ we are confident that the positive outlook for European equities remains intact,” he said.

However, Schroder’s senior European economist and strategist Azad Zangana is not so positive. He sees a potential disaster with the coalition’s economic programme. The country’s finances could be led down an “unsustainable path” and could lead to another government debt crisis, which has the potential to also affect the wider eurozone. “For Europe more widely, the impact from an Italian debt crisis would be severe. As the third largest member state, Italy would simply be too big to bail-out for any significant period of time.” And there is no quick fix on the horizon. Stick with the UK would be my advice. But reserve Italy for holidays while the threat of showdown persists.