Happy New Year!
Our first with a baby… we did not make it to midnight, yet still woke up on New Year’s Day shattered and fragile.
Hopefully you will be glad to hear I do not like to make resolutions or grandiose predictions. Too often this time of year is used as an excuse to publish lists, touting top 10 trends for the year and quick fix self-help guides. These tend to be click bait that is cobbled together, which I doubt even the authors can recall the details of by the end of the first quarter, let alone be held to account at the end of the year.
As investors we should not be driven by the calendar. Instead we should be continuously looking to the future, and willing to adapt to new information and events at any time.
Entrenched trends also care little for the calendar. And the end of the year will mark little change for many companies.
Management teams will soon be giving their outlook statements for the year ahead. I’d be deeply sceptical of any that communicate a ‘New Year new me’ style message. If it was that easy gyms would be as busy in December as they are in January.
Something no one predicted, but that has been driving markets, is the Novel Coronavirus. It is early days and the tail risk is disturbing, but context is important. At this stage the number of people infected and who have died are relatively low, when compared with the flu, which the Centres for Disease Control and Prevention estimate since 2010 has caused 12,000 to 61,000 fatalities per year in the US alone. The media has an interest in sensationalising the narrative but history suggests these events tend to be poorly priced.
After the election result I think most of us would have expected UK equities to perform strongly, led by domestic stocks. However, as I noted in my December blog, the narrative would cynically move to the challenges of negotiating a trade deal.
I’ve been surprised how quickly this has come to fruition. Since the election the UK equity market is up less than 1%. It is the more international FTSE 100 that has outperformed the more domestic FTSE 250 in January. I think the narrative on UK assets is too pessimistic and there remains a clear value opportunity.
January has been a good environment for stockpickers. I mentioned previously that buying of ‘Brexit baskets’ was distorting the market. It has been reassuring that in January, the market has quickly regained common sense when valuing the component stocks of these baskets.
The long
Persimmon. This housebuilder was in the headlines for the wrong reasons in 2019. Poor build quality and customer service led to speculation Persimmon could be left out of the next iteration of Help to Buy. The stock aggressively de-rated.
However, the management team has worked hard to change perceptions and there are signs of improvement. This has not come at the expense of cash generation or returns, which has reassured investors and meant the stock looks very cheap. We think Persimmon and a number of the other housebuilders are well placed to benefit from improved UK sentiment.
The short
M&S rallied strongly in the latter stages of 2019. For me, this exemplified the blind buying of UK equities without due consideration of fundamentals. A trading update at the start of January confirmed little has changed. Like for like growth continues to be desperately hard to come by, while weak gross margin guidance drove downgrades.
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. Past performance is not a reliable indicator of current and future results.
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