It says something about the challenges the UK market faces when Brexit is not the biggest risk investors fear. While Britain leaving the European Union arguably presents one the greatest tests Britain has faced as a nation, from a market perspective, a far-left government under Jeremy Corbyn is decidedly more worrying.
With all this in the mix, it is no wonder overseas investors have shunned the UK, while domestic investors have opted to sit on the side-lines. Indeed, since the referendum result, the UK has been put in effective investment quarantine.
But despite stiff macroeconomic headwinds, there remain plenty of reasons to allocate to the UK. Furthermore, the current gloom is likely to drive more volatility, which will create attractive entry points into the market for the long-term investor.
We continue to see bottom-up opportunities in high quality businesses that have the buffer of diversified global markets with high returns on capital, as well as classic growth names.
We have cash to deploy in these areas, particularly when we see non-domestic-facing stocks fall victim to indiscriminate selling.
Where investors need to tread lightly, we believe, is in the area of domestic cyclicals. As the Brexit saga rolls on and a general election fraught with danger comes into view, we may see further negative sentiment weigh on consumer areas, particularly on firms that are producing big-ticket items, such as motor distributors and manufacturers.
The reality is higher taxes, increased regulation and more obstacles to investment would be inescapable with a Labour government driven by such left-wing economic ideology. This is a far more daunting prospect than Britain going it alone in Europe.
This phenomenon, known as the ‘lipstick effect’ – which postulates consumers will forego expensive items for inexpensive discretionary items when facing economic crisis – will likely prevail until economic certainty is lifted, despite signs of wage growth.
Ultimately, long-term investors must remember political and economic flux are a perennial feature of the markets. Fortunately, it is possible to harness macro-driven volatility to generate alpha, but they must be careful to avoid the obvious pitfalls.