Policymakers should shift from trying to stimulate the economy with failing monetary policies to using more fiscal measures, according to JOHCM UK Equity Income fund manager Clive Beagles. 
This, he adds, will lead to opportunities in a number of sectors currently unloved by the market, something he aims to exploit in the coming months and into 2017.
“It [interest rate cuts and quantitative easing measures] really does appear to be having a very limited impact and may well be having a negative impact on economic activity,” he said.
“The whole idea of emergency interest rates was all about lowering the cost of capital and try get companies to not sit on their hands, not sit on their cash and to invest, but the reality is that hasn’t happened.
“The policy has to change away from a monetary stimulus towards a more fiscally driven one.”
Beagles’ fund – which has a tilt towards value sectors – has performed well so far in 2016, returning 10.07 per cent as the value style rebounded. This is 2.69 percentage points ahead of the sector but 4.27 percentage points behind the FTSE All Share, as the below graph shows.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
Beagles said: “Generally we perform better when value is doing better so we’ve had some pretty strong headwinds to run into over the last few years but as you can see signs of life are starting to emerge.
“If we get these policy changes those signs of life will develop into something much more significant.”
Below, he outlines the areas he is particularly keen on and why he has been adding to his positions despite a number of stocks falling following the European Union referendum.
Construction
Beagles says that while this may seem obvious to some, construction will be a big beneficiary of any fiscal policies such as an uptick in infrastructure spending in an effort to jumpstart economic growth.
The fund is around 6 per cent invested in the area and, while the sector on the whole has outperformed this year with a rise of about 25 per cent, there are a number of specific stock examples which Beagles says remain cheap.
“You would imagine these stocks would have done quite well give the Brexit result, and we’ve done okay in the last six weeks, all the stocks we own in the construction sector are still lower than they were before Brexit,” he said.
“There are two types of stocks within construction we think are really interesting. First of all in the materials space, we own two of the brick manufacturers in the UK.
“The brick manufacturing in the UK is very concentrated, three manufacturers have 90 per cent of the market, effectively it’s an oligopoly.
“The other part of the market used to be served by imports, but guess what they’re going to go down because they come from Europe and we can see how the sterling-euro has moved.”
Beagles owns two stocks in the space: Ibstock and Fronterra, which as the below graph shows, have struggled to rebound to their pre-Brexit prices.
Performance of stocks in 2016
Source: FE Analytics
“So a very tightly controlled market, pricing levels will be firm and clearly the government desiring to increase home construction up to 200,000 a year, this could be a very rich area,” he said.
“And yet these stocks are trading on laughable valuations, on single figure multiples currently shifting through cash flow yields and the numbers are probably too low in the analysts’ forecasts.”
He adds that he also likes the companies expected to take on the projects funded by new fiscal policy measures, such as Kier Group and Costain.
“They will benefit from houses but also road maintenance, which will clearly be a big focus of spend, so again valuations are very low and absolutely in the sweet spot.”
Banks
The second and more controversial area is the banks and financial services sector, which Beagles sees as a real opportunity for investors.
“Certainly there are mixed opinions within the firm, but for us some of the domestic banks ought to benefit from this change of emphasis on policy,” he said.
“No one can question that valuations are low relative to history, I think regulation in the UK is at a much more stable and advanced level than maybe it is certainly in Europe.”
Indeed, banks dropped to one of their lowest points since the financial crisis in the wake of the EU referendum and remain some way off pre-2008 highs, as the below graph shows.
Performance of index over 10yrs
Source: FE Analytics
The fund owns three banks, Lloyds, Barclays and HSBC, though the latter is focused predominantly outside the UK.
“Last year Lloyds were able to do a special dividend and HSBC have been allowed to do a share buyback, so I think regulators believe these companies have got enough capital,” the manager said.
“So I think the real issue, other than some lingering legacy fine issues, is its harder for banks to make meaningful returns when interest rates are so low, which is why this change of emphasis from ever lower rates onto a fiscal expansionary policy, will be very helpful for these types of names.”
Additionally, he says insurers should also do well, with Aviva and Standard Life in the UK Equity Income portfolio.
“What really surprised us in that immediate post-Brexit aftermath is that these sort of stocks were hit very hard, they were down 25 to 30 per cent on the day,” Beagles said, adding that they remain on single price-to-earnings multiples.
M&A targets
“Less linked to the change in policy and more linked to what’s happened with Brexit and the currency, we have to anticipate more inbound M&A in the UK,” Beagles said.
Sterling has dropped 16.84 per cent so far this year against the US dollar, as the below graph shows, and Beagles suggests more M&A activity, following on from the takeover of ARM Holdings by Japanese telecoms firm SoftBank.
Performance of sterling vs US dollar in 2016
Source: FE Analytics
Beagles said: “We’ve begun to see a bit of it, there have been some big companies bid for, ARM of course was bid for quickly after Brexit on a big premium, and the fund has captured one or two bids over the last three months.
“The radio group that owns TalkSport was bid for at a 70 per cent premium, but there has to be more because, particularly in dollar terms, assets have become very modestly valued
Beagles highlights other firms including ITV, Brewin Dolphin, BBA Group, Laird and Northgate as potential takeover targets.
He said: “It’s not an exhaustive list, but it shows stocks that have a strategic value to others and where valuations are, in our opinion, very undemanding.”