Some UK funds a compelling buy looking at Brexit scenarios ?
Discussion
Looking at where sterling is with other major currencies and the potential of a no deal brexit I envisage the following scenarios:
Scenario A : No Deal = Value of £ declines and funds with large bias of profits from abroad will do very well due to the rate change on earnings.
Scenario B: A Deal or agreement= Value of £ increases in a relief rally and value of UK FTSE companies rise on the positive news of clarity moreover the risk of no deal not happening.
Scenario C: Further extension to Article 50 = Value of pound marginally increases and value of UK FTSE companies rise slightly on the liklihood of a Remain vote occuring in a referendum.
Scenario D: Election to occur around exit day with Conservative win - Result UK FTSE companies rise as no coalition with DUP, £ strengthens
Scenario E: Election to occur around exit day with Labour win - Result UK FTSE companies value rise, £ strengthens
Scenario F: Election to occur around exit day with Labour/Lib Dem coalition - Result UK FTSE companies value rise, £ strengthens
With all these scenarios I am thinking that those funds that have a bias with UK company earnings from abroad will benfit from any of these outcomes. I am looking at the likes of Fundsmith , Lindsell Train UK Equity, Lindsell Train Global Equity and CFP UK Buffettology et al. If £ strengthens and a re-rating of UK FTSE companies increases that bodes well. If £ weakens and FTSE companies decrease this will be offset by earnings from abroad which will be higher.
Scenario A : No Deal = Value of £ declines and funds with large bias of profits from abroad will do very well due to the rate change on earnings.
Scenario B: A Deal or agreement= Value of £ increases in a relief rally and value of UK FTSE companies rise on the positive news of clarity moreover the risk of no deal not happening.
Scenario C: Further extension to Article 50 = Value of pound marginally increases and value of UK FTSE companies rise slightly on the liklihood of a Remain vote occuring in a referendum.
Scenario D: Election to occur around exit day with Conservative win - Result UK FTSE companies rise as no coalition with DUP, £ strengthens
Scenario E: Election to occur around exit day with Labour win - Result UK FTSE companies value rise, £ strengthens
Scenario F: Election to occur around exit day with Labour/Lib Dem coalition - Result UK FTSE companies value rise, £ strengthens
With all these scenarios I am thinking that those funds that have a bias with UK company earnings from abroad will benfit from any of these outcomes. I am looking at the likes of Fundsmith , Lindsell Train UK Equity, Lindsell Train Global Equity and CFP UK Buffettology et al. If £ strengthens and a re-rating of UK FTSE companies increases that bodes well. If £ weakens and FTSE companies decrease this will be offset by earnings from abroad which will be higher.
Edited by Vergis on Sunday 4th August 08:26
I think there are two investment ideas here. One that GBP will strengthen or weaken materially when Brexit uncertainty clears. The other that UK quoted firms may be re-rated when Brexit uncertainty clears (and may, in time benefit from earnings as well as multiple increases).
There may be better ways to express these investment ideas than buying UKX exposure.
There may be better ways to express these investment ideas than buying UKX exposure.
This is a bit of a strange post.
To start with (and keeping things very simple) when the pound falls the FTSE generally rises accordingly to compensate (obviously not always, but I am keeping things simple).
Equally, when the pound rises the FTSE will often combat this with an appropriate downwards adjustment.
This is because they are non-correlated in circumstances such as these (most large FTSE companies have more overseas earnings than domestic ones, so a balance is struck).
The markets have already priced in much of this and whilst more is to come anyone trying to hedge against this to grab an extra slice is certainly very brave and would be a short term trader, rather than a long term investor.
The UK represents about 6% of the global economy. If you are taking a long term investment view based upon 6% of the global economy then there are other question you need to consider.
Markets also love certainty. Either a no deal Brexit or a Brexit with a deal would give this. Another extension or a GE would do the exact opposite.
All the markets want to know is which way things are going. I have my highest ever cash holding ever (though only 6%) as I wait to see how it unfolds. My market holdings remain close to what they were before though, as I am not trading, I am investing.
To start with (and keeping things very simple) when the pound falls the FTSE generally rises accordingly to compensate (obviously not always, but I am keeping things simple).
Equally, when the pound rises the FTSE will often combat this with an appropriate downwards adjustment.
This is because they are non-correlated in circumstances such as these (most large FTSE companies have more overseas earnings than domestic ones, so a balance is struck).
The markets have already priced in much of this and whilst more is to come anyone trying to hedge against this to grab an extra slice is certainly very brave and would be a short term trader, rather than a long term investor.
The UK represents about 6% of the global economy. If you are taking a long term investment view based upon 6% of the global economy then there are other question you need to consider.
Markets also love certainty. Either a no deal Brexit or a Brexit with a deal would give this. Another extension or a GE would do the exact opposite.
All the markets want to know is which way things are going. I have my highest ever cash holding ever (though only 6%) as I wait to see how it unfolds. My market holdings remain close to what they were before though, as I am not trading, I am investing.
To elaborate slightly more on my brief earlier post: A note on Fundsmith from earlier this week. Where everyone's running from another star fund manager, things can get overheated elsewhere.
"To us, a developing issue is the size of the fund, which we believe may, at some point, become more of a challenge for the manager. At around £19bn it is the largest UK retail fund and it continues to attract substantial inflows from investors. As a fund grows in size it can sometimes mean the loss of flexibility in terms of the number of available investments."
https://www.charles-stanley-direct.co.uk/News_Feat...
"To us, a developing issue is the size of the fund, which we believe may, at some point, become more of a challenge for the manager. At around £19bn it is the largest UK retail fund and it continues to attract substantial inflows from investors. As a fund grows in size it can sometimes mean the loss of flexibility in terms of the number of available investments."
https://www.charles-stanley-direct.co.uk/News_Feat...
Croutons said:
To elaborate slightly more on my brief earlier post: A note on Fundsmith from earlier this week. Where everyone's running from another star fund manager, things can get overheated elsewhere.
"To us, a developing issue is the size of the fund, which we believe may, at some point, become more of a challenge for the manager. At around £19bn it is the largest UK retail fund and it continues to attract substantial inflows from investors. As a fund grows in size it can sometimes mean the loss of flexibility in terms of the number of available investments."
https://www.charles-stanley-direct.co.uk/News_Feat...
Fundsmith does not have a "Fund Family" behind it, it does not have the resources of some of the larger houses, with only 30 or so employees it raises the question of the number of analysts it has to handle a 19 B fund should it continue to grow."To us, a developing issue is the size of the fund, which we believe may, at some point, become more of a challenge for the manager. At around £19bn it is the largest UK retail fund and it continues to attract substantial inflows from investors. As a fund grows in size it can sometimes mean the loss of flexibility in terms of the number of available investments."
https://www.charles-stanley-direct.co.uk/News_Feat...
It's success can actually be it's downfall if it gets more cash than it can place.
A solution could be for it to close to new investors, a route taken by quite a few successful funds (in the US), it's a way of protecting their current clients.
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