In early 2015 I spent an hour with Nick Clegg in an airport hotel room. He made me a Leave voter. How? By telling me during our interview (the airport is often the best place to talk to a busy politician) that we have to accept that we “can’t change the reality”; that there are many things in the modern world that can’t be controlled, even by national governments.
A national government can have “only limited control” over global trade, international crime and climate change, for example. I can’t, he said, “think of an area of public policy now that is not impinged upon” by some kind of global decision-making. That makes Westminster something of a “fictional universe”. One in which people “seem to think that they have power” but which is actually a “19th century toytown in which they do not”.
For Clegg, this shift of power from national governments was both inevitable and reasonable. For me, as a firm believer in both the value of the nation state and the importance of maintaining the primacy of democracy over technocratic we-know-bestery, it was neither. This is why I have found 2018 so pleasing.
Most people are frustrated infuriated or just very bored with the raised activity (and passion) levels at Westminster. But I’m thrilled to see our MPs getting into the groove of having to make huge decisions for their country – decisions for which they know they will be vigorously judged by their constituents. That they aren’t particularly good at it shouldn’t be much of a surprise. The upwards shift in power Clegg described has long left them with not as many nation-critical decisions to make as the more sovereign governments of the past. They are out of practice.
QE has been doing a lot of the heavy lifting for investors
As this is a financial column, let me ask you to think of the EU as being to governments rather as quantitative easing (QE) is to fund managers. Something that does most of the heavy lifting for you (whether you want it to or not), leaving you to grandstand around the edges – thinking you have power but actually operating in a fictional universe in which most of the real decisions are outwith your control.
This brings me to the second reason why 2018 has been particularly interesting – the end of QE. This has been underway elsewhere for a while, but this week Mario Draghi announced (as expected) that the European Central Bank (ECB) will join the US and the UK and end its own bond-buying programme at the end of this year (despite utterly miserable growth prospects in the eurozone). Just as our politicians are taking back their agency (hooray), our fund managers are being given theirs back (also hooray).
For the last decade, QE has done the dirty work of keeping markets rising – managers have had to little more than stay invested (any old how) and write the odd clever sounding bit of analysis around the edge. Their very own fantasy universe.
Those days are gone. Those in doubt need only check out the year’s market performance numbers. Everything’s down on the year. Most things look like they are planning to stay down.
The good news is that for the rational ordinary investor there is a neat way to take advantage of the confusion of our MPs and our fund managers about the return of agency. Buy UK equities.
Thanks, in the words of Hargreaves Lansdown, to the “long dark shadow” of Brexit, UK investor confidence (on their in-house measure) is now lower than it was even in the depths of the financial crisis – a time when the entire global economy was genuinely threatened with full on implosion. The ten year average for the index is 94; the lowest point hit during the crisis was 61; today it is on 52.
You can see this fear of the UK reflected in the list of the most popular funds for clients of BestInvest over the last year. UK investors have been a little loath to venture abroad in the past, but this year eight of the top ten funds are global. Fundsmith Equity, Lindsell Train Global Equity, HSBC American index, a global Vanguard ETF, Stewart Investors Asia Pacific Leaders, Fidelity Emerging Markets, Threadneedle European Select, and Artemis Global Income.
A mere two are UK orientated, and in the case of both of them, BestInvest is keen to stress that they aren’t – horror of horrors – domestically orientated (“many UK listed companies are very international in nature and should not be seen as a bellwether for the domestic economy”).
If you strongly believe that a no-deal Brexit is most likely outcome at the moment (I don’t); that a no-deal Brexit will produce long-term economic hell (given the millenium-bug-style preparations underway and the self-healing abilities of open economies, I really don’t); and, finally, that economic difficulties automatically translate to market difficulties (they don’t – valuations matter more) this extraordinarily negative sentiment might make some sense. If not, it does not.
Brexit is producing real value in the UK market
But the emotion around Brexit is nonetheless producing real value in the market. Over to old-style value fund managers Oldfield Partners, global stock-pickers with “a very heavy value bias…driven by bottom up stock valuations”. The result of this is that Oldfield is now “significantly overweight the UK” and in particular in those stocks that are properly exposed to our domestic economy (think BT, Britvic and Darty Group) as opposed to the international exporting stocks that move up and down with the pound (BP, Shell, Rio Tinto and the like).
It makes no sense, says Oldfield’s Edward Troughton, that so many firms should be valued like this when – despite Brexit – our economic background is “pretty reasonable” (full employment and steady growth). It’s also worth noting that when you buy into the UK today you get a great yield. Not all dividends will be sustainable, of course, but the UK market is currently yielding 4.9% – more than inflation and much more than all other developed markets.
That means that, while you might have to wait for some of the value in the market to be realised, you will at least be paid for that wait. As the analysts at Morningstar say, UK equities are “unloved, reasonably cheap and fundamentally healthy… somewhere between 30%-45% cheaper than the US on a combination of valuation metrics.”
Buying into the UK is also “one of the least crowded trades in the marketplace.” Stick some under the tree for your kids (this is as good as a long-term present gets) – and then sit back and join me in enjoying watching our MPs and fund managers endure their Christmas crash course in accountability.
• This article was first published in the Financial Times