The fall in the value of sterling after the UK voted to leave the EU on 23 June last year has created new opportunities for TM Cavendish Opportunities manager Paul Mumford.
Since last year’s referendum, sterling has crashed 13.91 per cent against the US dollar. It has fallen again since the general election in which prime minister Theresa May and the Conservative party saw its majority shrink.
Performance of sterling vs dollar since the EU referendum
Source: FE Analytics
Yet Mumford, who invests for the long term, is not concerned about this fall, and said that it has given him new opportunities in the domestic-focused UK sectors.
“What’s happened recently is that the fall in sterling has created the situation where domestic stocks have been up against big headwinds,” the manager said.
“The tailwinds are on the exporters and companies with overseas earnings so people have been concentrating more upon the companies that are benefiting from sterling rather than the ones that are having problems. 
“I think that in due course sterling will recover – I can certainly see the pound back to $1.50 in due course and even with the Brexit uncertainties I think that one of the big attractions to the UK is the fact that we’re not going to be exposed as much to the European economies, we have our own currency and we don’t have to rely upon the euro.
“I don’t think the UK will be quite considered the same as Switzerland but I think it will be considered a place that you can park your funds if you’ve got problems elsewhere,” he added.
However, Mumford (pictured) said timing things like currency movements is extremely difficult and he therefore invests for the medium-to-long term.
The manager said: “It might not be for another 10 years, I haven’t got a clue about the timing but I think it is too low and some stage it will recover.
“The timing is always difficult and I wouldn’t want to try and predict when but the level of sterling has thrown up opportunities and I will grasp those while they’re there.”
The first area Mumford likes is retailers. The manager said: “I think consumer spending is going to be okay and where you’re getting decent yields there is good value and you can get surprisingly decent movements.”
Retailers have come under pressure since the Brexit vote with the FTSE All Share General Retailers sector losing 3.69 per cent compared with 22.45 per cent gains made by the broader FTSE All Share.
“I’ve been [focusing] on the domestic stocks more recently which have built up in the portfolio and retail would be one decent area,” Mumford said.
Performance of indices since EU referendum
Source: FE Analytics
While some of these additions have been related to the currency moves, some have also been included for technical reasons such as Debenhams, he said.
“You’ve got Debenhams, which everybody seems to hate, where the yield will pay for itself over the longer term but because the price performance hast been particularly good it looks as though it’s about to drop out of the mid-cap index into the small-cap index,” Mumford said.
He said that this creates a price pressure point as most tracker funds will be forced to sell it when it leaves the index.
“The share price has got down to a technically very low level of below 50p and when it moves down small-cap trackers will come in and buy it again,” the manager explained.
This, coupled with a new management team that “probably stands a reasonable chance of getting things right”, should provide a bounce-back in the price.
“I think it is much easier for them to turn things round than it might be for Marks & Spencer for instance,” Mumford said.
“Although Marks & Spencer have got a really good food offering even entrepreneurs with the best reputation in the world haven’t been able to get the clothing side right.”
However, there are alternatives to Debenhams, with Mumford also pointing to N Brown and Next as two other companies that are undervalued.
“N Brown was something of a ‘doggy stock’ until recently but the share price has been picking up reasonably sharply this year while others haven’t been so good,” he said.
“In the large-cap area people have decided that the Next brand is finished and over and done with,” he added.
“Nevertheless that is a very well-managed company, the directory side is doing quite well and I’m sure that they’ll get their offering right and the price will recover in due course – but of course the income tends to pay for itself in the meantime.”
Another area of the market he favours is the pub sector, which he said are offering decent yields, good growth prospects and have companies on relatively low price-to-earnings (P/E) ratios.
“Things like Marston’s and Greene King where you’ve got decent food offerings and hopefully the summer remains fairly good then they’ll be trading quite well,” said Mumford.
While Wetherspoons has been an outlier in the sector as it has performed relatively well, Greene King and Marston’s have not seen the same rebound and remain “quite decent value”.
“Even if the share prices don’t move, you’re getting a decent income from them,” Mumford said.
The final area the manager is focusing on is the building and property sectors which have taken a hammering over the last two years, losing 8.58 per cent over the period.
Performance of indices over 2yrs
Source: FE Analytics
Not strictly a property company, but one with a property development arm is Kier Group, which Mumford said has been “neglected” by investors due to its large diversification of interests.
“That’s another one that gives you an attractive proposition over the medium term,” the manager said.
“It has a decent property development side which is giving them decent margins compared to the construction and building side which gives them very low returns.”
Focusing on property in particular, he said that residential property remains difficult but there are other areas that are attractive.
He said: “People don’t particularly like the property sector and certainly when you look at residential properties I wouldn’t be particularly keen on the housebuilders as there are some signs of a slowdown.
“But I think some of the commercial property companies are doing reasonably well and I think the buy-to-let will continue to do well and you’re getting some of these development companies on decent asset discounts.
“Things like Grainger – one of the largest residential companies – which has been concentrating more on the buy-to-let market or St Modwen Properties the brownfield developer all look quite decent.
“One of the things that people overlook in the case of property companies that have got decent portfolios is that they now look quite attractive investments for the overseas investors.
“With sterling having depreciated by 15 per cent or so it’s a lot cheaper to buy these assets than it was a year ago so there are signs that overseas investors are coming into some of the marketplaces still.”