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Jupiter’s Steve Davies: Why this won’t be another 2008 crash

23 August 2016

The manager, who heads up the £1.4bn Jupiter UK Growth fund, explains why he is positive about the opportunity set available for investors at the moment and why he doesn’t believe the UK economy is on the brink of turmoil.

By Lauren Mason,

Reporter, FE Trustnet

The uncertainty surrounding the Brexit vote and the erratic behaviour of the market is not evocative of conditions before the 2008 financial crisis, according to Steve Davies (pictured).

The manager, who heads up the £1.4bn Jupiter UK Growth fund, says that there are tailwinds on the horizon for the UK economy and that there is a wealth of attractively-priced opportunities in the market despite the FTSE 100’s recent rally.

It is well known that, since the EU referendum, the UK blue-chip index has risen sharply, returning 12.86 per cent in less than two months.

Performance of index since referendum

 

Source: FE Analytics

While this is deemed to be good news by some investors, others are far more cautious that a big market sell-off is now on the cards given how quickly it has soared and the level of economic uncertainty in the UK at the moment.

In an article published last week, research from MetLife found that 58 per cent of advisers believe the market will nosedive before the year end, with 44 per cent of participants currently recommending clients who are retiring within five years to lock in gains now – the EU referendum result was cited as the biggest reason for this negative sentiment.

Davies believes we could be in store for a mild recession, but he says that it is unlikely to be a repeat of 2008’s financial crisis.

“2008 and 2009 was about as uncertain a period as you could ever come up with and actually this feels much less difficult than that period in some respects,” he said.

“The absolute falls in share prices were much greater then, we had a collapse in demand around the entire globe all at one time and also it was a good five or six months where we didn’t really know whether the world was coming to an end or not.”

“This time does feel less stressful than that. The UK consumer is carrying on their lives fairly normally, we’ve had a pretty quick bounce back in a lot of asset prices as well. 2008 and 2009 was definitely of a higher magnitude than what we’ve experienced.”

One of the reasons that some investors believe the UK market could nosedive is the volatile performance of domestic-facing stocks further down the cap spectrum compared to the blue-chip index.

For instance, the FTSE Small Cap and FTSE 250 indices returned 5.24 and 5.79 percentage points respectively one month after the vote compared to the FTSE 100’s return of 9.69 per cent.

Just one month later though, the aforementioned indices have almost caught up following a sudden surge in their performances over the course of August so far.

Performance of indices since EU referendum

 

Source: FE Analytics


Despite this, Davies says there are still plenty of good recovery opportunities within UK domestic names.

“We’ve priced in a mild recession and there are some signs that the consumer reaction might not be as bad as that, so I think we’ve seen some bounce back already but there could be further to go,” he pointed out.

The manager has made a number of changes to the Jupiter UK Growth fund since the referendum. He has bought a number of “bombed out” domestic names including the likes of Taylor Wimpey, ITV and Hays. He has also bought into a selection of global-facing names such as Merlin, Inchcape and Carnival, which he thinks will benefit further from weaker sterling.

As such, the fund’s cash levels have been reduced since Brexit to a 3 per cent weighting, although Davies points out that this is held in dollars.

While the manager is seeing a wealth of opportunities and remains upbeat, the fund’s performance has been lacklustre since the start of the year. Year-to-date, it is the worst-performing fund within the IA UK All Companies sector, having lost 9.71 per cent while its average peer has returned 6.4 per cent.

Performance of fund vs sector and benchmark in 2016

 

Source: FE Analytics

This could partially be because of the £1.4bn fund’s large weighting in banks, which have been hit by ultra-low interest rates – the financials sector currently accounts for 22.56 per cent of its portfolio and it holds the likes of Barclays, Lloyds and Legal & General in its list of top 10 holdings.

“I think there’s still a good recovery opportunity in the banks albeit lower interest rates for longer is clearly going to make things a bit more difficult for them,” Davies continued.

“Lloyds, for example, I think is very capable of paying a 3 per cent dividend this year and it could be as much as 5p if the UK economy doesn’t fall as much as people are expecting.”

“Barclays are actually making really good progress, still trading on half book value and I think doing all the right things that can get them up to one times book value.”

“The really good catalyst there would be if we can see the sale of their South African business in the remainder of the year.”

The manager has also been adding to his positions in challenger banks such as Virgin Money, which he says has a high-quality chief executive officer, a good attitude to risk and the ability to grow almost regardless of economic conditions.


In terms of the broader macroeconomic conditions, Davies says that the cut in interest rates will be helpful at the margin and will improve consumer cash flow as well as general sentiment.

He adds that, while low interest rates could be detrimental to banks, the Bank of England’s launch of the £100bn Term Funding Scheme will offset the impact that rates will have on banks.

“I think now it’s really about fiscal stimulus picking up the baton, so it’s over to the chancellor in the autumn and cutting stamp duty rates would be one obvious thing to do, maybe infrastructure as well is going to be a key focus for him,” Davies said.

“I’m no currency forecaster but I think the right assumption is the weak sterling is here for a good while to come. Obviously it’s helpful to anyone exporting form the UK and that’s good – we need to address our current account deficit.”

“The flipside is: does it bring in more inflation and hit consumers’ disposable incomes? I suspect inflation may be a bit of a dog that doesn’t bark. We’ve actually seen quite a sharp drop in the oil price since the vote so I don’t think petrol prices are going up any time soon.”

“There’s still a huge amount of competition in the food retail sector as well so I suspect the risks of inflation might be a bit more muted than people are thinking.”

 

Since Davies took to the helm of Jupiter UK Growth in 2013, the fund has returned 41.32 per cent, which is broadly in line with its sector average and an outperformance of its FTSE All Share index of 3.38 percentage points.

Performance of fund vs sector and benchmark under Davies

 

Source: FE Analytics

The fund has a clean ongoing charges figure of 1.02 per cent and yields 1.7 per cent.

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