What a show!
‘We are going to enjoy ourselves”. A prophetic utterance from President Charles de Gaulle at the time of his opposition to the UK’s entry into the Common Market in 1963? More than 50 years later, the Brexit saga may amuse some and disappoint others, but it has clearly poisoned the life of investors over the last three years as they have turned away from UK equities. However, once the saga draws to a close the situation could change.
Remember that though its weighting has declined in the indices – 25% of the MSCI currently compared with 33% before June 2016 – the UK market is still by far the most dominant one in Europe. Its assets ? It is both deep and diversified. Private equity funds are well aware of this and have been steadily purchasing the brightest entrepreneurial stories over the last six months (from the aerospace parts suppliers COBHAM to the brewing group GREENE KING via MERLIN ENTERTAINMENT, etc.)
In view of the scale of its balance of payments deficit (5.6% of GDP), the UK also resembles certain emerging markets. And there are many examples from the past – Asia in 1997, Russia in 1998, Brazil in 2002 – illustrating the fact that crises in ‘unbalanced’ countries can offer a fertile hunting ground. This same fate could soon apply to UK equities, while investor underexposure to this asset class is at record levels at a time when the valuation discount for these shares to world equities is back down to levels last seen at the end of the 80s. Brexit could constitute an historic opportunity for the UK to redefine its economic model and boost its growth potential (Singapore-on-Thames?). There is no doubt that a Conservative government will appreciate the need to make reforms underpinning both investment and business.
Some caution is required. As a disruptive force, the UK economy is highly digitalised and this has a big impact on two sectors historically favoured by investors: banking services and retailing. If Brexit is resolved, these sectors could enjoy a relief rally that will most probably be temporary.
For some the list of concerns is growing, but the bold are well aware that the FTSE 250 index offers a host of opportunities. In this brave new world in prospect, we will always seek to identify those jewels that reflect the performance and boldness shown by Echiquier Agressor over the last 28 years!
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