Hello and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall
and I'm joined today by Simon Brazier, Manager of the Investec UK Alpha fund.
Hi, Simon. Good morning Emma.
So we had a bit of pullback in Q4 last year. Markets have come up slightly since then but
are things looking attractively valued, did that give us opportunities or do you think
actually there is more to come. I think it gave us some opportunities, but
the reality is we're 9, 10 years into a bull market and valuations across the pace is still
relatively full. So, and I do think there is more risk to come. So the worry for me
is that we definitely haven’t seen the lows in markets. Because if there was more concerns
around some of maybe the macro risks, you could see valuations coming down due to uncertainty.
While we are talking before the camera started rolling about what some of those risks were
and you said that it would be foolish not to flag there is some risk it could be a recession
in the UK. How big a risk is that and should investor be concerned?
I think investors should be concerned. I do worry about the UK economy. There is only
four components to GDP. What the consumer spends, what businesses spend, what governments
spend and our net trade position. Net trade doesn’t make a big impact.
The Government has said that they are going to increase government investment spending
I think with one eye to where the economy could be, but also post Brexit they want to
make sure there is some stability in economy from their point of view. But they can't do
all the heavy lifting and that’s the point, two-thirds of UK
GDP is the consumer and about 20% is business investment, and business investment growth
has just seen basically a year of negative growth. And that’s no surprise to me reality
is longer term the UK has to fund itself we have a big – we have the largest current
account deficit in the G7. You have to fund that. And the reality is, that was done previously
via business investment and foreign direct investment and Brexit has put the uncertainty
in place. And so, that's why you've seen weaker currency
to try and attract flows elsewhere and I don't see business investment increasing anytime
soon. Even if we had a wonderful Brexit, you still haven't got a free trade agreement in
place. So, I still think there's uncertainty. But the biggest issue is the consumer. And
the consumer has been relatively well-behaved. I mean, there's only two ways you can grow
consumption in the UK One is growing real wages and one is increasing spending and reducing
your saving. The Office for Budget Responsibility is telling us that the savings ratio is basically
zero right now. So, people are saving none of their disposable
income if you don't include pension saving. Therefore, they have got the consumer – the
only other place to go is to grow through real wage growth. And I don't believe that
many of us are going to be demanding above inflation real wage increases the next few
years. And if we saw any hit to the economy and people started to save more, that just
reduces GDP. So, I worry that the consumer and the economy
to a degree is slightly on the edge. And when you've got GDP numbers at the moment of around
1% falling below zero is quite possible with those sorts of dynamics I'm talking about.
So, there is a risk there. Before people get too depressed, we should
maybe caveat with the fact that the economy is not necessarily the stock market, is it?
Because low currency has actually been really good thing for the FTSE 100.
And luckily, for us, is that we have the safety valve of the currency. I mean, there are longer-term
implications about that. But the reality is, is if you see more stress around Brexit, or
even more stress in the economy, sterling will weaken. Less than the third of UK revenue
for companies comes from the UK and it provides a big fillip to the stocks markets and is
that safety valve. So, you know, definitely, as I say to people,
don't underestimate the UK stock market. We are the third largest equity market in the
world. We have wonderful corporate governance and great global businesses. And for me, there's
a lot of opportunities, very liquid and we have some many, both large and mid-cap stocks
that longer-term look quite attractive. But just be aware, I think, that there's been
a lot of people saying, you know what, the UK consumer, domestics are oversold, this
is the biggest opportunity I've seen. I'm being a little bit more patient.
Simon, thank you very much. Thank you.
This is Emma Wall for Morningstar. Thank you for watching.