Is the UK really a safe haven?

Managers from Liontrust, Allianz, Standard Life Investments and other top groups give us their views.

NO – UK FACES MANY CHALLENGES

Richard Marwood, portfolio manager, AXA Investment Managers

It wouldn’t really be prudent to describe the UK as a safe haven as the UK faces many of the challenges that other western countries are confronting. The UK has a heavily indebted government struggling to rein in a fiscal deficit at a time when the domestic economy is relatively weak and could struggle to recover in the face of increased taxation and reduced public spending.

However, the UK does have some advantages relative to other parts of the world, such as control over its monetary policy and its own floating exchange rate. It must be remembered that the fortunes of the UK equity market are not necessarily dependent on the UK economy, as many of the companies quoted in the UK make the majority of their earnings overseas. Indeed, the London market is home to many businesses which are global leaders in their industries.

THERE ARE FEW SAFE HAVENS

Alan Clifford, manager of the LAM UK Equity Income fund

There are few ‘safe havens’ in equity markets when sell-offs of the magnitude we saw in early August occur.

Yet  following the recent volatility, valuations  are now very appealing on many metrics, but in particular we see the key attraction of UK equities at present as being their cash flows and significantly stronger balance sheets. With 10-year gilt yields of around 2.5%, the forward dividend yield on the UK equity market of 3.6% is compelling.

The UK also has the benefit of its own currency and an austerity programme already being phased in. While it would be naïve to suggest the UK is not facing its own macro-economic challenges, the UK equity market generates much of its earnings in other regions.

While there are a number of macro risks yet to be resolved in the coming months, in our view attractive valuations, strong cash flows and continued global economic growth are all positive influences for UK equities.

NO STOCK MARKET IS AN ABSOLUTE SAFE HAVEN

Anthony Cross, co-manager of the Liontrust Special Situations fund

No stock market can be seen as an absolute safe haven, including the UK. The FTSE All Share fell 11.94% between 7 July and 12 August 2011, for example, with individual share price declines being pretty indiscriminate and often driven by liquidity more than some magic “economic vulnerability measure”.

But I believe investors can find UK-listed stocks that are less vulnerable in the short term to a collapse in demand. These include companies such as Spirax Sarco, Domino Printing, Rotork and Weir because of their strong intellectual property and distribution networks coupled with frequently high recurring income through service or replacement parts.

I also believe investors can protect their relative performance when fears of a global slowdown emerge by not owning mining companies and retail banks.
Furthermore, the stock market falls provide the opportunity to buy companies with barriers to competition and good growth prospects over the long term at a cheaper price.

Many have a strong international growth profile such as specialist engineers and oil service companies.

YES – THE UK WILL NEVER DEFAULT ON ITS DEBT

Ana Armstrong, managing partner, Armstrong Investment Managers

The UK is a safe haven, in that it will never default on its debt and that its fiscal situation is slightly better than that of the US and peripheral Europe. However investors are essentially now paying the UK government for the privilege of lending to it. UK CPI is running at 4.4%, and RPI at 5%, while 10 year gilts are yielding 2.5%.

“Investors” attempting to avoid risk in markets, are choosing a certain loss in the real value of their portfolios vs. an uncertain market environment driven by massive amounts of debt in the West and weak growth prospects as consumer spending faces significant headwinds from falling real incomes.

UK gilts are very safe if you are concerned with the nominal value of your wealth, but very dangerous if you care about the “real value of your wealth after inflation.