The long and short of it: A month is a long time for UK investors
February might be the shortest month, but it crammed in an awful lot this year as investors tried to digest the ongoing Brexit developments, mixed economic data and a raft of corporate results and announcements. Callum Abbot, Portfolio Manager of the JPM UK Equity Plus Fund, an active extension strategy, gives his views on markets over the last month.
February might be the shortest month, but it crammed in an awful lot this year as investors tried to digest the ongoing Brexit developments, mixed economic data and a raft of corporate results and announcements.
No love lost
UK politicians didn’t get the Valentine’s memo as splits and fractures in Labour and the Conservatives forced some introspection. However, the prime minister seems to be building some momentum behind her deal, with the eurosceptics increasingly concerned that Brexit won’t happen at all while the europhiles are increasingly worried we’ll crash out without a deal. The unpopular middle ground could be May’s deal!
Remarkably Labour’s eurosceptic leadership have been forced into supporting a second referendum in an attempt to keep their party together.
It remains as clear as mud but optimism is building, causing sterling and UK domestic equities to rally. Remarkably, the UK homebuilders are up 24% year to date (as at 28 February 2019, source Bloomberg UK house builders index).
In the wider economy the data has been mixed, but the month ended on a positive note. In the US, fourth-quarter GDP growth was ahead of expectations at 2.6% annualised (source: US Bureau of Economic Analysis), giving confidence that the world’s biggest economy was maintaining its positive momentum.
In China, the data has been weak but investors have become reassured that credit growth and stimulus can reinvigorate the economy--helping to drive the mining sector up 11% year to date (as at 28 February 2019, Source: Bloomberg).
February was also heavy with corporate results as companies started to report their fourth quarter, second half and fiscal year numbers. UK companies have thus far recorded strong earnings growth with support from the commodity sectors helping boost the overall market.
Companies have reported big capital returns in several major sectors. In financials, the big domestic banks are all targeting returns of excess capital through a combination of special dividends and buybacks. In the energy sector, both Shell and BP are targeting buybacks as their cash generation has vastly improved despite lower oil prices. Finally, in mining Rio Tinto has announced that it will return USD 4 billion of capital to shareholders1 (source; Rio Tinto, 27th February 2019). These announcements bode well for shareholders and illustrates the cash generation potential of many companies in the UK index.
A company that has not enjoyed a whiff of a bounce back in 2019 following a torrid 2018 is the challenger bank Metro Bank. The company struggled with capital and margins last year. In 2019 these issues continued but were compounded by a miss classification of risk weighted assets, deferral of profitability and growth targets and yet another capital raise. All this has taken the year-to-date total return to -47% and the 12-month total return to -77% (source Bloomberg, 28th February 2019).
One more thing…
A graph that has been well received by our clients shows the yield gap between UK dividend yields and UK Gilts. Going into Brexit the gap is at its largest since the First World War, implying there is generational value in UK equities. We’d argue that while there are real risks facing the UK equity market, the valuation gap is out of kilter with the context of the environment, which presents a valuation opportunity.
Source: Global Financial Data, Datastream, Citi Research. Data as at 19 February 2019. UK equities in comparison with 10 year Gilts.
1Forecasts are not a reliable indicator of future performance.
For Professional Clients only – not for Retail use or distribution