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In the second part of our series of video interviews with Mark Barnett, Invesco Perpetual's head of UK equities answers questions from Citywire Money readers.
Thanks to everyone who contributed questions ahead of the interview, and apologies that we weren't able to ask more than we did.
In this video, Barnett discusses why he is more optimistic on the prospects for UK domestic stocks than most, how the Brexit negotiations are impacting his stock picking and the potential impact on markets from a Labour government.
Daniel Grote: Last week, ahead of this interview we asked Citywire Money readers for their questions to you. So Ken Adams asked, 'I’m not so concerned about past performance, I’m much more interested in what he thinks about the future of UK equities.' and you said before that you think domestic UK stocks have been unfairly punished by the Brexit vote. What makes you so convinced that other investors have got it wrong and they are going to perform better than expected?
Mark Barnett: Well again, the UK economy-, just as a starting point here, the UK economy is, albeit performing less well this year than last year, it’s not falling off a cliff. Far from it, actually. The key three GDP numbers that we saw a few weeks’ ago were better than expected and actually, represent an economy which is still expanding. That as a starting point is a much better outcome than most people would have anticipated immediately post the referendum result.
We have, what looks like a weak government, as a result of the general election and actually, there is uncertainty at its height at this point in time and if we get-, which I believe we will do, if we get a resolution to stage one of the Brexit negotiations, which is effectively the divorce bill that we’re negotiating at the moment, Sterling will continue to rally, as it has done all year by the way. It bottomed in January. Sterling will continue to rally and the expectations around the outlook for UK domestic companies will be slightly less bad than it is today and that will create a nice tailwind for UK stocks.
DG: On that note, if I just turn to a couple of questions from another of our readers, Micawber. On the Brexit negotiations, you’re enthusiasm for UK domestic stocks, how would that change under different sorts of Brexit and to what extent are you factoring that into your strategy?
MB: My starting point is that we will not have a hard Brexit.
DG: If we do?
MB: It will make me think harder about putting fresh money in. Having said that, I’m not putting forward a case for a strong UK outlook and I certainly think you have to tread carefully when you’re going into UK stocks because there are all sorts of pressures around, not just because of the Brexit negotiations, because of the way the economies evolving, because of the digitisation of the economy, because of wage pressures etcetera. So there are issues in the background.
We’ve had some high levels of inflation this year, which have pressurised consumption a little bit. There are issues around. So I’m not suggesting that we’re going to move to this very positive scenario for the UK economy. I just think relative to what’s priced into these assets, I think there is a disconnect that is not reflected in the valuation of these companies.
DG: You mentioned governmental impact on some of the stocks that’s happened over the last year or so. A Labour government, how would that change how you perceive the UK economy and domestic stocks?
MB: The starting point would be the market would probably take that bearishly. Currency would fall again particularly, in response to their suggestions around nationalisation and around government borrowing etcetera. Actually, the UK economy-, if what they were trying to do was put more money into people’s pockets, then that might help in certain regards with the aspects of consumption in the economy. So I could put together a set of scenarios which suggest that in the short-term, the economy would do alright under a Labour government.
Longer term there would be issues around the amount of debt that they would propose to accumulate and how that would affect the long-term financing outlook for the UK economy and the deficit etcetera, but in the short-term actually, I could put forward an argument which suggests that potentially, the UK economy might not do too badly in the short term.