Monique Wong, multi-asset investment manager at Coutts, has said there are opportunities in UK equities despite the uncertainty surrounding "the elephant in the room", Brexit.
In particular, Wong is bullish about UK domestic stocks such as banks, housebuilders and the FTSE 250 segment of the market due to these companies being "unloved", "underappreciated" and "hugely under-owned".
UK assets experienced a torrid time in 2018 amid ongoing Brexit uncertainty and a sell-off of risk assets globally, with the FTSE 100 and 250 dropping 8.7% and 13.3%, respectively, versus a 3.8% fall for the MSCI World. Meanwhile, the IA UK All Companies sector declined 11.2% over the year.
Brexit remains the key risk for UK assets; however, Alan Higgins, CIO at Coutts, assigned the chances of the UK leaving the European Union without a deal to between 5% and 10%.
Last Wednesday (23 January), sterling rose above $1.30 to its highest level since last November on reports shadow chancellor John McDonnell hinted Labour could support a backbench proposal to stop a no-deal Brexit by delaying the divorce date.
"There are three impossible scenarios but we know one has to happen," Higgins said. "It will be either a version of [Prime Minister] Theresa May's deal, no-deal or a second referendum but all three seem impossible."
Higgins predicted some version of May's deal will be voted through Parliament and will become the final terms of the UK's exit from the EU.
Wong believes this "pragmatic" outcome would cause UK equities to rally, especially domestic stocks. The investment manager added the UK has the institutions in place to deal with May's agreement.
"If you have a pragmatic Brexit outcome, there is a huge buying opportunity in UK equities as there will be a recovery in the UK economy, businesses go back to doing business and it is under-owned," she said.
Furthermore, the Coutts team have increased their weighting to gilts due to the negative correlation to equities the asset class has displayed, especially during times of market stress.
Although 10-year gilt yields remain unattractive at below inflation levels, Wong said they showed this inverse correlation during the sell-offs in February and October 2018.
Caught in crossfire following Equity Income fund suspension
Liquidated in 2012
OCF of 0.10%