Rathbones' Stick on UK value opportunities
We are 11 years into one of the greatest stockmarket upswings in history, yet the joy has not been evenly spread.
Brexit has dominated the agenda to the detriment of all else, causing rancour among us and putting the brakes on the UK economy and its stockmarket.
Policy-making has been non-existent, businesses have been afraid to invest and people have been reluctant to spend. Investors the world over decided to abandon our market until we sort ourselves out.
Rathbones' Carl Stick on the one stock that has been in the Income fund for 20 years
This appears to be changing. After the election, there has been a marked revival in the housing market. Retail sales finished the year in dismal fashion, yet the Rightmove house price average posted its largest January rise on record.
This augurs well for a recovery in the confidence of households to spend - the major driver of the UK economy.
Greater UK Government spending should be unveiled in March, and you have a large, politically stable economy with fiscal impetus and a widely admired rule of law.
That tends to entice traders in normal times, let alone when combined with a stockmarket trading at a huge discount.
Sure, there is a lot of uncertainty to come from Brexit, and the Government could well botch the whole thing, regardless of its resounding mandate. Yet, importantly, the UK now has a united front in its negotiations with the EU.
There are plenty of risks in the UK - as there are everywhere - but investors are taking that risk for much lower prices.
We believe there are some great companies here in the UK that have fallen deep into shadow because of a tough few years. It should not take much improvement in the landscape to reverse that bombed-out feeling.
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There are UK-focused firms such as auto parts and bicycle retailer Halfords. Its performance has been poor over the past few years, but it has minimal debt and sports a free cashflow yield of 12%. That is truly mind-boggling when the 10-year gilt yields are close to 0.6%.
There are international companies with similarly eye-watering free cash-flow yields: tobacco giant Imperial Brands offers 14%. If equity investors do not recognise this value, others will.
M&A was rife in 2019. Why should 2020 be any different with value like this?
Carl Stick is manager of the Rathbone Income fund
Bull Points
• The UK stockmarket is extremely cheap
• High cashflow yields attract predators
Bear Points
• We have just started down the bumpy Brexit road
• The FTSE may have been permanently de-rated
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