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Latest News  04/06/2019

Investing in Challenging Markets

Senior Investment Manager at Cornelian, Ewan Millar gives his take on recent market activity and outlines how the company is positioned accordingly.

UK equities fell sharply during the latter part of 2018 as global economic growth began to slow, calling into question the projected pace of monetary tightening by global central banks, most notably the Federal Reserve. The main concern was that a policy error had, or was about to occur, possibly leading to recession. Equities were sold off to levels arguably priced for a recession, a mild one anyway. Thankfully the Federal Reserve was not blind to the changing environment and adjusted their policy agenda accordingly – fewer rate hikes and less quantitative tightening. Global and UK equities recovered significantly during the first four months of this year as a result.

Although risks may have dissipated, the recovery does feel rather fragile. The apparent breakdown in trade negotiations between the US and China has been the most recent trigger for stock market weakness. Ultimately, a good trading relationship is strongly in the interests of both countries and therefore we expect discussions to resume and a deal to be done, eventually.

Beyond trade negotiations, global growth is likely to get incrementally better as the year progresses. China has been taking measures to stimulate their economy, the US is slowing, but from fairly lofty levels and should stabilise, and the Eurozone should pick-up as global exports recover.

The UK equity market remains an attractive market for bottom-up stock pickers.

The UK equity market remains an attractive market for bottom-up stock pickers. Businesses that are exposed to structurally growing end markets and are able to maintain or improve their market positions are underpinned by a secular growth in earnings. If afforded a medium to long-term investment horizon, investing in such stocks allows portfolio managers to largely look through the business cycle. Stocks such as RELX, DCC and Rentokil offer compelling through-the-cycle earnings growth whilst trading on reasonable valuations.

RELX is a global information and analytics business which has market leadership positions in a number of different sectors. Their fastest growing area is within information gathering and data analysis which their well-diversified customer base is increasingly investing in. DCC is a global sales, marketing and distribution company with strong positions in the four divisions in which they operate; LPG, Retail & Oil, Healthcare and Technology. Management continue to grow these businesses using a disciplined strategy of bolt-on acquisitions. Lastly, Rentokil is exposed to underlying structurally growing markets, most notably pest control in North America.  Rentokil should be able to continue to gain share in these markets adding an additional lever of growth to their story going forward.   

The Brexit calamity has caused uncertainty, and particularly curtails international investors’ appetite for buying UK assets. Therefore, optically UK equity valuations are cheap – forward PE of 12.9x and a 4.5% dividend yield. Even if a rather unappealing Brexit outcome is agreed, the removal of uncertainty should result in a re-rating of UK stocks.

Sources: Cornelian; FactSet

Ewan Millar
Senior Investment Manager

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