James Edgedale, Chairman
As we are all aware, since the referendum, UK investors have benefited from the fall in the pound due to continued concerns about Brexit and the risk of a change of government.
Over the last few years, we have generally taken an international stance on investment and my belief is that we should continue to do so long-term. It certainly has helped performance in recent years but having said that, the London Stock Market is in its own right very international with approximately 70% of the earnings of the top 100 companies coming from overseas; whereas, the FTSE 250 is the opposite with 70% of the earnings being domestic. Up until recent months, international companies have significantly outperformed domestic companies but to some extent that has been reversed and in recent weeks the gap in valuation levels has been noticed by investors.
We always live in uncertain times and with modern technology and modern media, everybody is aware of any problems that happen anywhere in the world worthy of mention by journalists within hours of it happening. Forty years ago when the UK stock market was somewhat more volatile, during the Wilson/Heath era, it is worth remembering that the stock market and our economy were very dependent on Great Britain and therefore, the risk of significant political swings was so much greater than today.
Once Brexit is out of the way, if the pound remains as low as it is against the US Dollar then I can see a lot of overseas money, particularly dollar money, coming into the UK taking advantage of the low level of the pound, whether it be investment by American biotechnology and pharmaceutical companies setting up laboratories around Oxford and Cambridge, or some of the top US tech companies setting up their European headquarters in London. Or it might simply be dollar based companies or private equity houses buying up cheap UK assets. Either way I think it is time to be more domestically orientated from an investment perspective. Markets have a knack of anticipating events before they actually happen and to some extent this is why the UK market has behaved as it has over the last few weeks.
The main focus on international markets in the last year or two has been growth in America, particularly the technology companies, but there is a sharp variation in valuations across the world. Leading Asian exporting technology companies tend to trade on a fraction of the value of their American competition. For a long time America has tended to lead the way in many areas but the Japanese also have technological expertise and their economy has been moribund for 25 years. Their stock market is still trading at half the level it got up to 25 years ago and yet, although the government is heavily indebted, Japanese people and companies tend to be cash rich. It has been quoted that the value of the Emperor’s palace in Central Tokyo might have been worth the equivalent value of all the property in California; that certainly would not be the case today.
Looking at the performance of economies and stock markets of countries which host the Olympics, I note that generally speaking, markets tend to perform well when host nation. If Japan’s stockmarket was going to have a good year then looking into my crystal ball, one could reasonably expect it to be in 2020. They certainly did a good job with the Rugby World Cup despite the meteorological challenges.