Each week, a professional investor tells us where he'd put his money. This week:Ed Legget of Artemis UK Select.
For a stockpicker rather than a pollster, the periods surrounding general elections can be frustrating. Swings in the polls mean increased volatility in sterling and a mood of provisionality clings to the equity market. So for me, the main positive aspect of having an election this year is that it pushes the date of the next one forward to 2022.
This delay makes some form of transitional deal for the UK after the two-year Brexit negotiating period comes to an end more politically acceptable and thus more likely. This, in turn, reduces the perceived risk of a "no deal" Brexit, which is helpful for sterling.
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The negotiations to leave the European Union will also shape the fortunes of UK stocks, particularly those most attuned to domestic demand. And while I remain positive on a number of these UK-focused companies, I accept that the valuation multiples that the market awards them will probably struggle to move decisively higher until there is greater certainty about the outlook. In the meantime, they will need to rely on increasing their earnings or offering a solid income if they are to generate good returns.
One industry that should continue to grow profits and provide dividends is housebuilding, where we own Redrow (LSE: RDW). A combination of undersupply of new houses combined with low mortgage rates should mean that current returns on capital across the sector prove more sustainable than today's share prices imply.
However, not all the stocks in my portfolio depend on the domestic UK economy. Take 3i (LSE: III), the private-equity group, for instance. Its investment in European discount retailer Action accounts for more than 30% of its portfolio. Action is similar in concept to B&M in the UK a non-food discount retailer and is currently growing its revenues and profits rapidly by opening around 200 stores a year in Europe. Action is one of the few retailers I have seen where opening a new store pays for itself within a year. This puts the company in the enviable position of being able to pay out significant dividends to 3i while still funding its own growth.
Another UK-listed stock that is growing overseas is Prudential (LSE: PRU), the insurer, whose Asian business is large and growing. My enthusiasm for this firm reflects early signs that the recovery in new business is broadening out beyond its core markets in China and Hong Kong. I believe that it can grow profits at a double-digit rate for the foreseeable future. This is not reflected in a price-to-earnings ratio of just 12 times. Prudential is withdrawing from the annuities market in the UK and, in time, may dispose of its "back book" of annuity business. This will free up significant capital that can either be reinvested in Asia or, more likely, be returned to its shareholders.
