In 35 years as a professional investor, I have seen a large number of value opportunities, but three stand out: the undervaluation of ‘old economy’ shares in the winter of 1999-2000; the distressed pricing of whole swathes of the financial markets in early 2009 following the financial crisis; and the priced-to-go-bankrupt valuations of much of the UK market today. 
Great value opportunities are always extremely unpleasant except in hindsight. We now know that ‘old economy’ shares and the value style outperformed the broader market every year from 2000 to 2007, and how powerfully the market recovered in 2009 following the central banks’ adoption of the policy of quantitative easing, which aimed to underpin the values of financial assets.
There is a strong urge to wait on the sidelines until any crisis is resolved, even though experience tells us markets have always recovered before that moment arrives. Investors who are considering selling their UK assets, and the funds through which they invest in the UK, might like to consider just how much bad news is already priced-in.
Price anomaly
We are not the only ones to see the mispricing of UK assets. Two of the companies in which we invest, Tarsus and Telford Homes, have been recently taken over. On 16 August, Cheung Kong announced an agreed takeover of the brewer and pub owner Greene King. The striking detail in the announcement was the agreed price – a premium of 50 per cent to the previous day’s closing price.
This transaction confirms rational investors are prepared to pay vastly above current market values for the long-term returns on offer. It would not surprise us if a kind of feeding frenzy in depressed UK assets were to develop. It is also worth noting that Cheung Kong hasn’t bothered to wait for clarity on the outcome of Brexit.
During the second quarter of the year, the UK economy shrank by 0.2 per cent. A recession is defined as two quarters of negative growth. Thus, if there is as much as a 0.1 per cent contraction in the current quarter, then the UK will be officially in recession.
Brexit woes
However, the cause of the slowdown is well known; it’s the uncertainty surrounding Brexit. This has led to consumers postponing major purchases, and businesses postponing investment. This hiatus has developed over the last three years since the referendum. The uncertainty is at its highest now because the three main outcomes – no Brexit, no-deal Brexit, and some form of compromise all remain possible, but the direction is unclear.
Despite the gloom, prospects for the UK consumer are surprisingly positive. Employment is strong. The current workforce, 32.8 million, is at a record level. This number has grown steadily from 31.1 million in the fourth quarter of 2012, a net job creation of around 250,000 a year. The UK employment rate (age 16-64, seasonally adjusted) at 76.1 per cent, is at its joint highest level since comparable records began in 1971. Unemployment is now just 3.9 per cent. Not only are there more people in work, but they have more money to spend. The latest figure for wage growth, 3.7 per cent, is the highest for over a decade, and is accelerating.
TB Wise Multi-Asset Income is a multi-asset income fund, with the flexibility to invest in any asset, anywhere in the world, and with no restriction on the proportions invested.
With such a mandate we could avoid the UK altogether. The reason why we have chosen to invest an unusually high proportion of the fund in the UK, and in particular into sectors such as retail and insurance that serve the UK consumer either directly or indirectly, is because of the growing disconnect between our estimates of the values of these assets, and the prevailing market valuations. We are also attracted by the very high rates of dividend yield on offer – whereby we are paid to wait for the price recovery.
Tony Yarrow is co-portfolio manager of the TB Wise Multi-Asset Income fund. The views expressed above are his own and should not be taken as investment advice.