Will we live long enough to see Brexit? Is the US dollar heading for a bear market? Will wages take off in 2019? John Stepek asks the experts at our Christmas Roundtable.
John Stepek: How will Brexit affect markets next year?
Jim Leaviss: Since the 2016 referendum, sterling has already weakened substantially. On the Big Mac index, it’s one of the world’s cheaper currencies. And we don’t have that doom loop that existed in the US in 2008 after the Lehman Brothers crash, whereby falling asset prices created more panic. Now if sterling falls a bit…
Tim Price: …it just boosts FTSE 100 earnings.
Jim L: Exactly. If anything, weaker sterling helps. So I don’t think we have that to worry about. Even so, I think next year will be very difficult for sterling assets. Bank of England governor Mark Carney’s worst-case scenario for commercial property was the one that
I thought was the most worrying – down 48%.
Jim Mellon: Yes, but how good has his forecasting been in the past? British assets and property were overpriced well before the referendum. So it’s not surprising they’re coming off, and maybe Brexit’s adding a bit of impetus to that. But I’m selling property in Germany at the moment because I think it’s overcooked, and I’m looking very closely at UK real estate investment trusts. They’re well managed, selling at discounts (which will probably expand further), pay sustainable dividends, and have relatively low fees. It’s not there yet. It’ll be another 10% or 20% down – but I disagree with doom-mongers who think the UK is toast.
Alastair Mundy: What’s striking among investors is this sense of: “I wouldn’t touch UK stocks with my mate’s bargepole”.
John: “Uninvestable”, as the Financial Times puts it.
Alastair: “Uninvestable” – typically spelt “B–U–Y”!
John: So have you been taking advantage of this idea that Britain is “uninvestable”?
Alastair: We’ve been building exposure to Britain for a couple of years. Banks have been the biggest part of that, because it’s been the pariah sector for ten years now. I just sense we’re at a point where there are not many people left to sell banks. For me, Lloyds (LSE: LLOY), RBS (LSE: RBS) and Barclays (LSE: BARC) all look cheap – they have repaired their balance sheets (with encouragement from the regulator) and loan growth has been modest over the last five years, which suggests bad debts shouldn’t be a big issue. There is some competition from challenger banks, but the high-street players have large, fairly inert, deposit bases. That gives them a competitive advantage.
The management is new and the corporate memory is great – if you’ve only just screwed up within the last decade, you’re probably not going to be first in the queue for screwing up next time. And my ambition is very simple for them. I just want them to be dull and boring. So unless the outlook for the UK significantly deteriorates, then I think they will see pretty decent returns via the dividends and re-ratings.
John: This time last year we talked about inflation and interest rates rising and how that would boost banks’ profit margins. So when do the shares take off?
Alastair: Personally, I’m all out of catalysts. I thought value was going to bounce when bond yields started going up two years ago, and nothing’s happened. Then again, I still don’t know what the catalyst was for the market falling in 1999.
Charlie Morris: But banks have done much better in America, where bond yields have been rising; and they’ve done a bit better in Britain, where bonds yields are a bit higher, than in Europe and Japan, where banks have been terrible. So there does seem to be a link there.
Max King: The problem with UK banks now is that they need more capital than before, and with interest rates so low, it’s hard to make a decent profit margin and, in turn, a decent return on capital. But within those constraints, if you can find a bank trading on or below book value, it’s going to be interesting.