Managers look overseas as UK economy stagnates

Managers running UK-focused portfolios have turned to international stocks for returns as the UK’s recovery continues to disappoint.

Figures released last week showed Britain’s economy grew just 0.5% in Q1, following a 0.5% contraction in Q4.

The number undershot economists’ expectations of up to a 0.8% increase and prompted investors to continue favouring internationally exposed companies.

Max King, strategist for the global asset allocation team at Investec, said the GDP figure was “disappointing” even if there was a slight bounce-back from the previous quarter.

“Those who are heavily invested in the UK should use this as an opportunity to diversify internationally,” said King.

 “Investors have too much in the UK and we would have to see significantly better valuations relative to overseas to put more money in, which we do not see.”

Anthony Cross, manager of the £66m Liontrust Special Situations fund, warned the economy is at risk of stagflation, leaving exporters one of the few sectors likely to benefit.

“We may well be in a stagflationary environment, with global price rises in commodities and poor UK growth.

“Growth is clearly anaemic, with a very tough environment for UK consumer-facing companies, and we are finding exporters are doing better.”

Julie Dean, manager of the £75m Cazenove UK Opportunities fund, agreed the outlook for the UK economy remains weak, with government spending cuts due to begin in earnest in Q2, putting the squeeze on household incomes.

She warned growth could remain depressed as the manufacturing sector fails to pick up the slack from other areas.

“The big picture here is even though Western manufacturers are recovering well, manufacturing is no longer a big enough contributor to Western GDP to get real wage inflation and consumption growth recovering.”

However, not all managers are negative on the outlook for UK stocks. Paul Spencer, manager of the £420m Rensburg UK Mid Cap Growth trust, has sold 15% of his exposure to overseas earners to reinvest in UK-facing stocks over the last six months.

He said although certain international stocks have undoubtedly performed “extremely well”, this is now reflected in the price.

“There was a genuinely strong reason for selling some of the stocks with overseas exposure and reinvesting into domestically exposed stocks, where the outlook was uncertain but the ratings were really starting to factor that in.”

Julian Chillingworth, CIO at Rathbones, said the GDP figure confirms his view growth will be sluggish in the UK this year.

Despite lower valuations, Chillingworth said now is not the time to return to domestic-focused stocks such as retailers.

“We have been assessing the attractions of the retail sector, which is on a cheap valuation, but people are pretty bearish on consumer spending this year. So we would like to see a continued pick-up in growth before we jumped into that area.”
He said the Q2 and Q3 growth forecasts would be key to timing the move back into consumer stocks.

“If people believe the economy is beginning to gradually recover, they may well look at some of the domestic sectors again in the UK.”