By Leigh Himsworth, portfolio manager, Fidelity UK Opportunities Fund
Perhaps I and many other commentators are guilty of focusing too much on the gloom, and like the evening news, the bad usually makes far more interesting headlines. It is also true that as Brits we do love a good grumble. We’re probably world champions.
So now I force myself to look to the positive, in contrast to other recent articles.
In the near term: interest rates are low, inflation is low and monetary stimulus is massive in most of the major economic zones and there appears to be a generally concerted effort to boost demand globally. The price of oil has fallen over 50% and economic surprises are growing in the UK and US.
I also think it is essential that, from time to time, market professionals should take time out and step back from the screens to figure out what the ‘real world’ might be up to rather than trying to over-analyse numbers and confuse ourselves with ‘confirmatory’ charts.
A chance meeting in a Gatwick Airport car park last month has caused this re-assessment. A simple throw-away comment from an attendant – “never known a February like it, the place is rammed” – has caused my re-think. I did pause and consider a retort that included quoting the overall level of UK indebtedness and questioning where he thought tax receipts would appear from, but he wouldn’t have cared, his lot in life is on the up and it is, crucially, expectations that determine a downturn, recovery or boom.
In isolation, such a comment could easily be dismissed, but it takes on greater significance when joining this ‘dot’ to other similar recent experiences – a nephew gaining interesting employment, trains are bursting, hotel staff are full of life and bubbling about the business, struggling to book a table at the local pub…things out there look okay.
Time to move back to the confirmatory charts.
A key set of stats that I have been keeping an eye on through the downturn, and which I have referred to in previous notes are the loan officer surveys. Until recently, they have shown little demand but the most recent, in January, has shown signs of life.
Net percentage of domestic respondents tightening standards for commercial and industrial loans
Source: The Federal Reserve Board, January 2015, Senior Loan Officer Survey
Add this in the UK to the Asda Income Tracker for January that suggests UK discretionary income should be £16 per week higher year-on-year, largely due to the fall in food and oil prices.
Many consumer stocks have moved in anticipation of this playing though. The next stage has to be early stage cyclical stocks, the sorts of companies that supply the restaurants, cinemas and even cars. As a first step, I have been raising exposure to those stocks with short order books, taking positions in Premier Farnell, Alent, Computacenter and St Ives – attempting to get broad exposure sector-wise and geographically.
I am conscious too that I don’t want to get sucked-in near a top. Yes, markets may well see some near-term set back due to modestly stretched valuations and as we draw nearer to the first rise in interest rates, but reporting so far in the UK has generally been good, with few unpleasant surprises, and the stocks listed above are good value. This should offer some protection into any market weakness, with each trading below 11x forward EV/EBIT.
Yes, I could have written about the forthcoming UK general election and the possibility of some extreme coalition partner demand or that a Greek exit from the euro could be catastrophic (note the excellent article from Jenni Russell in the Times on 19 February 2015) – but that’s exactly what you would have been expecting!