With the trade deal with the European Union having come into effect on 1 January, investors are wondering whether it may be the turning point for UK equities, despite the UK currently being in its third lockdown.
Members of the Association of Investment Companies have said what their UK-focused fund managers make of the post-Brexit trade arrangements, the impact of three lockdowns and, finally, the longer-term outlook for the UK investment community.
They focused on sectors and companies that may become the winners and losers from the deal. While portfolio companies have had a number of years to prepare for the various potential outcomes of Brexit negotiations, the trade deal, which allows a continuation of tariff and quota-free trade in goods between the UK and EU, is welcomed by Guy Anderson, portfolio manager of The Mercantile Investment Trust.
“In particular, companies that source goods or material inputs from the EU should benefit from low-friction trade and a stronger sterling,” Anderson said. For example, convenience food producer Greencore estimates that up to one-third of its raw materials are sourced from the EU. “While the company had done extensive contingency planning, the trade deal will have been well-received,” he added.
For lead manager of SVM UK Emerging Fund, Margaret Lawson, however, it is too soon to tell if the trade deal will materially help to trade in her portfolio companies. “But it offers more certainty about the UK economy and outlook.
The last four years have seen international investors reduce UK exposure and many UK wealth managers also rebalance to be more global resulting in UK equities lagging other main markets,” Lawson explained.
“There is now an opportunity to catch up,” she added. Many of Lawson’s funds targeted companies are focused on enterprise services using e-commerce, while others include companies helped by sustainability trends.
“I expect investment in supporting business resilience and strengthening supply chains to continue. UK economic recovery is likely to be led by government encouragement for sustainability and environmental improvement,” she added.
London’s financial services sector is one area where some details still need to be finalised, but for Abby Glennie, investment director of Standard Life UK Smaller Companies Trust, this is not necessarily a negative thing.
“If anything, this might bring opportunities for fund administrators such as JTC and Sanne as client funds may need to be realigned with the new regulatory environment,” Glennie said. Some companies may even benefit from the increased level of red tape and new regulations required by importers and exporters, as Glennie singled out digital specialist Kainos.
“It designs the digital processes required to help businesses cope with these new regulations.”
Anderson, however, does see negatives, particularly in the long term. Even though the trade deal ensures tariff-free trade in goods for the foreseeable future, an end to freedom of movement could impact labour availability in some sectors that employed large numbers of EU citizens, he said.
He further added, that this could include retail and food production. Food packaging companies too rely on workers from the EU at their facilities.
Fund manager of the Henderson
High Income Trust, David Smith said: “The majority of the companies in the portfolio have been preparing for some form of Brexit for a number of years so the impact of the trade deal is likely to be manageable.
“With greater restrictions on the movement of labour it is likely that wage costs will increase. However, companies have been investing more in automation at their plants to help drive better efficiencies and to help offset any wage pressures,” Smith added.
(The writer is our foreign correspondent based in the UK)