Uncertainty Equals Opportunity

Brexit negotiations are in full swing and the British Government has now agreed to honour all of its financial obligations to the European Union (EU). This commitment puts the estimated gross cost in the region of £85 billion and covers all outstanding budget commitments, including the pension liabilities of European employees. A final figure is unlikely to be published as part of the withdrawal agreement as the full cost will not be known for decades given that pension liabilities will run until the last EU official claiming a pension has died.

Of course, the final figure will be significantly smaller than £85 billion. Once the United Kingdom’s rebate and share of European Assets are taken into account, the net figure is likely to be closer to £45 billion. This is equivalent to about 2.2% of gross domestic product and will amount to over five per cent of overall government spending in 2019-20, the year that the UK is set to leave the European Union.

Discussions now move on to the second phase, with talks on the long-term relationship between the UK and the EU. Whatever happens next, it will be many years before we can really assess the true economic impact of Britain leaving the EU. With so much uncertainty, it is easy to be pessimistic, but allowing uncertainty to deter you from investing could prove a costly mistake.

Macro-economic data continues to surprise, and good companies don’t stop being good companies because of political machinations. The UK and Europe are home to thousands of firms making products consumers want and need, regardless of what’s going on in the political world. Innovation and advancements in technology are also having a positive impact on corporate earnings and profitability.

Companies that are able to survive uncertain, even turbulent times often become more efficient and emerge stronger than ever. Successful management teams adapt and innovate when faced with a more challenging environment. Skilled investment managers are able to recognise these survivors.

In order to outperform the wider stock market indices, sometimes it is also necessary to invest with a slightly different approach. Stock markets may be trading at all-time highs but there are still plenty of opportunities to invest in undervalued companies with good growth prospects despite the short term political uncertainty.

Benjamin Graham, the father of value investing, said that the secret of sound investment was a “margin of safety”. In other words, buy at a price that allows for a range of unexpected, adverse outcomes. Some fund managers excel at identifying companies that may have fallen on hard times but, with good management and supported by strong balance sheets, have the potential to recover. As value investors, they buy shares in companies when sentiment towards them is poor, so the market valuation is often at a discount to fair value, but where there is good recovery potential. A contrarian, value driven investment style focusing on quality companies who are out of favor with the broader market, can lead to strong returns over the longer term.

In times of uncertainty, investors who focus on the short term can often give in to the temptation to sell investments and watch from the sidelines. But with interest rates below inflation, holding cash is guaranteed to erode the spending power of your savings (though your capital won’t fall in nominal terms). However, for those willing to see past the uncertainty, there are plenty of opportunities and an abundance of large, high quality companies able to survive and prosper in tough conditions.

The Clarion portfolio funds and discretionary investment models blend different investment styles and fund managers with the objective of providing clients with consistent, above average returns and with less volatility than direct stock market investing.