Skip to the content

The UK market is vulnerable to disappointment, warns Mark Barnett

07 August 2017

FE Alpha Manager Mark Barnett says that not all is rosy in the UK stock market, despite the FTSE All Share hovering around record highs.

By Gary Jackson,

Editor, FE Trustnet

Valuations in the UK stock market appear to have gotten ahead of fundamentals and any disappointment in earnings is likely to put them under pressure, according to FE Alpha Manager Mark Barnett.

Between the UK’s vote to quit the EUand the end of July 2017, the FTSE All Share posted a 25.5 per cent total return with the bulk of these gains coming from the larger members of the index.

Although the index has sold off somewhat over recent weeks, it remains close to record highs.

However, Barnett – who is head of UK equities at Invesco Perpetual and runs a number of the group’s flagship funds – warned that this does not fill him with confidence.

Performance of index between Brexit referendum and end of Jun 2017

Source: FE Analytics

"The steady rise in the UK stock market over the last 12 months has driven the FTSE All Share index and its valuation to record levels," he said.

"A year that generates a return of 25 per cent is impressive for any 12-month period in the UK market but, in my view, the recent period has rendered both the valuation and the current index level vulnerable to disappointment."

Barnett noted that performance has been driven by a more favourable environment for market earnings but this was bolstered by the “collapse” in sterling that followed the Brexit result, as it acted for a windfall for the companies whose earnings come from other currencies.

But he said this benefit is unlikely to be lasting and this is affecting how his constructing his portfolios.


"While the headline figures for earnings growth look reasonable for a number of sectors in the UK equity market, I worry that this currency-driven benefit has been largely accounted for and that too many risks are not priced into equities," the manager said.

"Following the US election and through the early part of this year, increased levels of optimism around global growth spurred the market higher still, but in the absence of a continuation of these trends, continued growth in underlying earnings looks unlikely."

The decision to hold a snap general election in June 2017 did prompt a short rally in sterling, which led to a fall in the internationally facing FTSE 100. Barnett pointed out that the pound has remained relatively stable despite prolonged political uncertainties created by the government’s failure to hold onto its majority.

Performance of sterling vs dollar over 3yrs

Source: FE Analytics

"Given the consensus pessimism priced in over the last 12 months, it is plausible to envisage an environment which is more positive towards sterling. That factor alone may be sufficient to restrain further earnings growth – particularly for the internationally weighted FTSE 100 index – in the event that the currency continues to strengthen,” he said.

"In terms of portfolio construction and positioning, I am currently considering currency to a greater extent when assessing the exposures or factor risks within my holdings, particularly in scenarios where currency moves have the capacity to unwind otherwise strong fundamentals.

"Since the vote for Brexit, I have been rebalancing the portfolios I manage, seeking to invest in companies where valuations are not dependent on sterling remaining weak. I have sold down some of the more internationally focused holdings which have performed well, and increased weightings in more domestically focused companies where, in many cases, the ratings seem to be at odds with the reality of these businesses."


Barnett believes that the market has taken an overly pessimistic outlook on stocks that are more tied to the UK economy, especially when it comes to the real estate sector.

This has led him to add to holdings in a number of companies where he sees positive trading prospects despite Brexit, including specialist real estate companies Derwent London, Shaftesbury and NewRiver Reit.

"Shaftesbury’s broad-based portfolio in London’s West End should provide some resilience in the event of a softening in economic growth and consumer spending. The diversity of tenants – a mix of restaurants, leisure and retail – fulfils the rising trend for a more complete retail offering, experienced through distinctive destinations and a range of activities, supporting long-term pricing power. The company aims to deliver total shareholder return via rental growth, which is currently underpinned by low tenant turnover and high demand," he explained.

"NewRiver invests in retail properties located across the UK; the company’s convenience-led portfolio, affordable rents and active asset management continue to support income – underpinning one of the highest dividend yields in the sector. My opinion is that sector influences are unlikely to abate in the near term, but maintain the view that fundamental analysis at the stock level differentiates performance over the long term."

Summing up his view of the UK stock market, the manager said he believes it will struggle to make significant progress although some areas – such as real estate – appear to have "significant recovery potential".

Performance of fund vs sector and index under Barnett

Source: FE Analytics

Barnett runs the Invesco Perpetual UK Strategic IncomeInvesco Perpetual Income and Invesco Perpetual High Income funds, as well as a number of investment trust.

Invesco Perpetual UK Strategic Income has made a top quartile total return of 163.34 per cent, beating the FTSE All Share by around 50 percentage points in the process.

The fund has an ongoing charges figure of 0.92 per cent and is yielding 2.99 per cent.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.