YOUR PORTFOLIO
/ ELECTION SPECIAL /
HOLD TIGHT…
Despite the uncertainty surrounding Brexit and the election, fund
managers have dismissed the idea of cutting UK exposure.
Anthony Luzio finds out why
I
T IS GENERALLY
NOT DIFFICULT TO
FIND two fund
managers with
opposing views on the same
subject. Every time one of them
sticks their head above the parapet
to say all the fundamentals suggest
the only way is up for a particular
sector or region, you tend not to
have to wait too long before
another one points out the easy
money has been made and all the
good news appears to be priced in.
This was what I thought, anyway,
until I decided to write an article
about whether investors should
cut their exposure to UK stocks.
With the choices for UK residents
in the upcoming election either
the most socialist government
since the 1970s, or, more likely, a
Conservative Party that appears to
have its heart set on a hard Brexit, I
thought this would provoke some
debate at the very least.
ALMOST UNEQUIVOCAL
However, the answer that came back
was almost unequivocal – “no”.
“Almost” is the key word here.
Chris Darbyshire, chief investment
officer at 7IM, is one of the few
managers who says investors
should consider cutting their UK
exposure. The 7IM Balanced fund
has just 10 per cent in the UK,
although it is overweight sterling to
hedge currency risk.
“There are many risks that
can be mitigated in life, but
country risk is not one of them,”
Darbyshire explains. “Country risk
typically occurs at times of deep
recession or financial crises and is
particularly pernicious, not just
on your investment portfolio, but
also your short-term earnings,
long term career prospects (what
we call ‘human capital’) and
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house value. These all decline at
the same time.”
“Such events are expected to occur
no more than once every 50 years
or so but, with Brexit, the risks have
become elevated. Much depends on
the government’s actual plans, and
the negotiations themselves, but
there is, perhaps, a one-in-10 chance
that Brexit leads to a deep recession
in the UK in the next few years.
While we hope that this will not be
the case, ‘hope’ is not an acceptable
investment strategy.”
The vast majority of fund
managers didn’t even entertain
the idea of following Darbyshire’s
lead – no matter how much their
outlook on the UK economy
differed from one another’s.
David Jane, manager of Miton’s
multi-asset range, says that with
the election unlikely to lead to
anything other than a stronger
Conservative majority, the UK may
even be considered a safe haven
“with clear political leadership, an
economy benefiting from a weak
currency, continued low interest
rates and a robust consumer sector”.
SHREWD
Mark Martin, head of UK equities
at Neptune, was more pessimistic,
saying there are signs that the UK
economy is slowing – which may
have even influenced Theresa May’s
decision to call an election.
“The timing was shrewd, not
only from a political perspective
– Labour has never been weaker
relative to the Tories – but also
from an economic perspective,”
he explains.
“Real wage growth has been
positive for some time, but the
most recent data point showed
a slight decline. With inflation
expectations increasing, negative
real wage growth could have a
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