“Depart or delay. Deal or No Deal. Abandoned by global investors, UK domestic equities and the British pound have enjoyed a revival in recent times. While the Letwin amendment may have dashed an immediate solution to the Brexit conundrum, there is a sense that we are now approaching the end game. At the time of writing, markets sniff a resolution is in sight, with the chances of a disorderly departure significantly lowered. Having sought refuge in the safe haven of international earners with valuations boosted by depressed bond yields, investors should assess whether the opportunity to revisit domestic companies is compelling.
“Of course, Brexit should not be viewed in isolation. Uncertainty has been intertwined with a fragile Government, weakening GDP, company administrations, falling inward business investment and unsettling proposals from the leader of the opposition. While the peak in the current global interest rate cycle has resulted in strong global equity returns in 2019, the wider market faces the threats of slowing global growth, trade wars, falling corporate earnings and nagging recessionary fears.
“But perhaps now asset allocators will look to revisit their self-imposed UK exile. Unloved and under-owned, the UK bond yield gap trades at its widest since WWII, while the normalised p/e sits at a 30% discount to global markets. This compelling arbitrage opportunity has not gone unnoticed by private equity players, funding debt off record low bond yields to buy UK equities generating a free cash flow yield in excess of 7%. When added to share buy-backs, the UK market is now shrinking at c.3% per annum.
“It remains doubtful that macro events can be accurately or successfully predicted over time. Understanding longer term structural trends and identifying quality and reliable companies, in a targeted, focused and active approach, remains key to longer term success. Nonetheless, UK equities have relatively suffered due to fears of a hard Brexit and the emergence of Jeremy Corbyn. If events do suggest these risks have significantly diminished, then perhaps now is the time to consider loving, and owning, UK equities once more.”