London-listed stocks have sunk to unjustified discounts on Brexit fears which are unlikely to disrupt overseas operations, Columbia Threadneedle head of UK equity Richard Colwell has said.
Speaking at a Columbia Threadneedle investment conference last week, the firm's head of UK equities and manager of the £4.2 billion Threadneedle UK Equity Income fund said that risk aversion had reached a more extreme level than that seen during the credit crunch.
Taken from Columbia Threadneedle
Colwell cited specialty chemicals company Johnson Matthey, which he sees as well positioned to move into the electric battery market after rejigging its management, as a particularly strong example in his portfolio.
He also pointed to WM Morrison as well positioned for recovery, with customers returning to the brand as it slashes costs and prices.
He noted that UK stocks – like those of Japan in the past – are now uncorrelated with other markets, potentially making them useful in diversifying multi-asset portfolios.
The ‘sick man of Europe’?
He said that the UK was historically undervalued compared to Europe and the US on a broad spectrum of long-term metrics such as price to earnings, dividend yield, and price to book.
Colwell said this suggests ‘investors have already acted on their fear ahead of the Brexit,’ and his team have made good money by ‘rifle shooting’ against the market and algorithmic traders.
He added: ‘The UK stock market is not the UK economy. It is the third biggest stock market out there. A lot of our biggest stocks listed in the stock market get a lot of their profits in the US.’
With FTSE 100 stocks earning 77% of revenue outside the UK, a 15% drop in the pound translates into an 11% rise in earnings per share in foreign currency, all else being equal.
‘This weight of money that’s come out of UK equities means that hotel stocks, chemical stocks, are much cheaper than their direct competitors that happen to be listed in Frankfurt or New York.’
|UK-listed companies||P/E 2018E||Overseas-listed companies||P/E 2018E||Overseas-listed companies||P/E 2018E|
|Smiths Group||17x||Becton Dickinson||21x||L3 Technologies||19x|
|Tate & Lyle||12x||Ingredion||15x||Bunge||16x|
|GlaxoSmithKline||14x||Bristol-Myers Squibb||16x||Novo Nordisk||18x|
|Imperial Brands||10x||Philip Morris International||15x||Swedish Match||21x|
|RSA Insurance||13x||Gjensidige Forsikring||16x||Tryg||21x|
|Wood Group||14x||Schlumberger||33x||Worley Parsons||25x|
|Intercontinental Hotels||22x||Hilton Worldwide||30x||Accor||34x|
Based on table taken from Columbia Threadneedle. Source: Bloomberg, as at 1 May 2018. The mention of stocks is not a recommendation to deal. All intellectual property rights in the brands and logos set out in this slide are reserved by respective owners.
The Threadneedle UK Equity Income fund returned 20.6% in the three years to June, compared to a sector average of 16.1% over the same period. It ranks 27/101 in its peer group.