DIY Investor Magazine
/
July 2016
28
What are the main risks?
•
Currency – the fall in sterling this will mean higher
input costs for those that import goods, such as
food and clothing retailers. The question then is
whether higher input costs can be passed on
via price rises - a highly competitive environment
such as food retailing may find it difficult and
therefore earnings growth forecasts will need to be
lowered. However, lower sterling will benefit those
companies that generate a substantial portion of
earnings in other currencies benefiting companies
in our fund such as such as Scapa and Elementis.
•
Interest rates – due to the expected slowdown in
UK economic growth, we expect interest rates to
either remain on hold or to decrease which has
implications for bank earnings, where margins have
already been under pressure due to low interest
rates environment. We hold a low weight in banks
and those that we do hold (such as Standard
Chartered) are quite international in their exposure.
•
Rising unemployment – in the face of uncertainty
some companies may put hiring decisions on hold,
and some companies will chose to relocate jobs
to mainland Europe. Rising unemployment would
impact retail sales, particularly of discretionary
items such as apparel, and would likely cause
an increase in bad debt for consumer lending
companies that we hold (such as Virgin Money and
Provident Financial).
Does it present opportunities?
Lower currency will benefit dividend payments, as a
substantial portion are paid to the fund in US Dollars
(such as HSBC).
At a broader level there will be opportunities, but
we need to be cautious of the negatives of Brexit
presenting themselves before the positives. For
example the lower currency should ultimately make
Britain a more competitive area to manufacture, but
ahead of new trade deals being negotiated international
companies may well be cautious of investing in the UK.
There may also be higher government spending in
infrastructure benefiting companies such as Hill and
Smith, or defence spending such as Babcock.
What does it mean for you at a portfolio level?
We have always tried to select companies that produce
specialist products (or services) that can compete
on an international scale which should not change
following the vote, but in the short term it will mean
changes in earnings forecasts and this is something we
will need to review company by company.
Some companies we hold (such as University spin-
outs, approximately 5% of the total Fund) will not be
materially impacted as what matters for them is whether
their technology works and is commercially viable, not
moves in the wider economy such as this.
It is events like this that remind us of the need for a
diverse portfolio.
We will be looking over the next few weeks and months
to try to spot opportunities where we think the market
is either being complacent over the negative impacts
(such as the negative impact on consumer confidence),
or underappreciating the positives (such as sterling
depreciation).
