Prime Minister Theresa May has fired the starting gun on Brexit by triggering Article 50, a milestone of historic significance and an act that will lead to years of wrangling and uncertainty.
Mark Martin, manager of the Neptune UK Mid Cap fund and a proven picker of successful FTSE 250 companies, believes the UK is approaching the Brexit period from a position of relative strength.
‘There have been some doubts around the impact of Brexit, but what we have seen so far has been positive steps taken by the Bank of England to loosen monetary policy. Sterling has also weakened significantly, which has stimulated the UK economy,’ says Martin, though he concedes there are slightly more clouds on the horizon going forward.
‘We are starting to see inflation coming through, partly driven by the weakness of sterling, and that may impact on consumer sentiment. In terms of performance, it has not been a surprise to see the market as strong as it has been.
‘Bond yields are still very low and there is still a big gap between bond yields and equity yields. However, it does feel as though valuations are reasonably full at a broad market level.’
Martin is seeing a number of exciting valuation opportunities across the market-cap spectrum. ‘This is particularly the case because of the potential for mergers and acquisitions (M&A),’ he says.
‘Sterling weakness is obviously encouraging foreign buyers and there was a huge amount of M&A in the FTSE 100 by historic standards in 2016.
‘However, in the FTSE 250, both on a relative and absolute basis, we actually saw very little. Consequently, we are very excited by the prospect of M&A in the FTSE 250 in 2017.’
Nevertheless, Martin has scaled back on some of the more cyclical, consumer-facing parts of the market represented in the portfolio.
The fund is underweight consumer discretionary stocks and it does not hold any retailers. Martin says he focus is on global growth themes.
‘We are overweight in sectors with a large export base, with notable positions in industrial exporters. Examples here include instrumentation company Spectris (SXS). In addition, many UK defence companies have a lot of exposure to the US, so we have been finding plenty of opportunities within this sub-sector.’
ARTICLE 50 IMPACT
On the impact of Article 50 on the UK market, Martin believes ‘the path of sterling will be very significant. We have seen the FTSE 100 perform very strongly of late, boosted by a weaker currency.’
‘Now, we think there is significant potential for FTSE 250 companies that also benefit from weakness of sterling to outperform. For example, there are companies that we have identified as ‘strategic’ and ‘financial’ winners in our opinion, but have been overlooked by other investors as they have been concentrated on FTSE 100 stocks.’
Holly Cassell, assistant manager on Neptune UK Mid Cap, says one of these investments is Brewin Dolphin (BRW), exposed to the very attractive UK wealth management market.
‘Not only does it have a number of self-help levers in terms of technological improvements; many of its assets under management are actually invested overseas. As a result, the assets should increase as sterling weakens.’
Cassell is also positive on environmental consultant RPS (RPS). ‘In recent years, performance has suffered due to its oil and gas exposure,’ she explains. ‘However, this is now a much smaller part of the overall business and we think the real opportunities for RPS lie in its exposure to infrastructure projects.
‘Infrastructure is a very hot topic at the minute in both the US and in the UK, despite there not being that many shovel ready projects.’