Investors should not be scared of the UK stock market ahead of this week's European Union referendum, says Fidelity's Alex Wright, as whatever the outcome the result will not be negative for all stocks.
The Citywire AA-rated manager of the Fidelity Special Situations fund and Fidelity Special Values (FSV) investment trust said while the UK economy and the pound would be affected by a 'Leave' vote the stock market would be more resilient as two thirds of companies generated their earnings from overseas.
‘You need to untangle the UK market from the UK economy,' Wright told investors. 'While a leave vote would be bad for the economy, it would not necessarily be bad for the market because of the number of companies that are facing other currencies.’
He added: ‘The important thing to look at is that even if a UK fund is heavily invested in UK-facing stocks, the market itself is very diversified. If the pound were to weaken that would be positive for earnings for 67% of the market.
‘The third of the market that is facing pound-based earnings would sell off initially, but that counteracted by the rest of the market getting their earnings from overseas and those currencies [appreciating] against sterling.’
Wright's funds have around 60% exposure to companies with overseas earnings. They hold 15% in stocks outside the UK, including 5% in US banking giant Citigroup and positions in French car maker Renault and a German real estate company.
Wright's comments last week came as investors continued to withdraw from the UK stock market ahead of the 23 June ballot. Figures from Bank of America Merrill Lynch suggested investors had pulled £750 million from UK stock market funds in June while European equity funds had suffered 19 consecutive weeks of withdrawals. Many popular investment trusts saw their discounts – the gap between their share prices and their underlying net asset values – widen as investors moved to the sidelines, fearful of volatile trading when the result is declared.
Meanwhile, a survey by Citywire's Wealth Manager magazine showed UK wealth managers on average held 8.5% of their discretionary portfolios in cash as they sought to protect investors from market turbulence.
Buying depressed 'domestics'
Wright (pictured above), a value investor, said he had topped up holdings in several domestic stocks whose share prices had been overly punished by fears of an economic reversal in the event of 'Brexit'.
Lloyds Banking Group (LLOY), whose shares trade at just nine times earnings, now accounted for 5% of Fidelity Special Values. ‘It is a play on the UK economy,’ he said. ‘This stock could be yielding 10% in 2017, which is too high considering the quality of the company. [It has] demonstrated ability to achieve returns above cost of capital.
‘Clearly a low [interest] rate environment is negative for banks, but some of the returns generated by banks – while somewhat depressed – and valuations are attractive, and so is the upside even if interest rates don’t move up. If they do move up it will be a kicker to earnings and people will be likely to buy into that trade.’
The lifting of the Lloyds stake fits into Wright’s positive view on financials, which represent 38% of his portfolio when real estate companies, such as a 3% position in Germany's Convert Immobilien Invest, are included.
Another cheap UK domestic the manager has tucked into was Royal Mail (RMG), now at around 4.5% of both funds, with a 8% free cash flow yield and a share price valued at just 10 times earnings.
Despite the value investment style being out of favour since the financial crisis, Wright managed to generate a 58.6% total return for investors in Fidelity Special Situations fund in the five years to the end of May against a UK All Companies average of 38%. Meanwhile, Fidelity Special Values is up nearly 80% in the five years to 16 June, according to the Association of Investment Companies.