InvestmentEurope has caught up with Alexis Charveriat (pictured), portfolio manager of the FDC Brexit fund at Paris-based boutique La Financière de la Cité.
The fund was launched on 30 December 2016 and aims to benefit from the new market environment created by the Brexit by investing in UK, Swiss and Scandinavian stocks. As of 31 January 2018, it had €83.19m of assets under management.
What key risks do you associate with the Brexit starting in a year’s time for UK equities?
We keep a constructive vision regarding Brexit outcomes. Since the results of the Brexit poll were released, the UK has beaten some of the darkest odds. In 2017, UK growth reached 1.8% against 1.9% in 2016, which is higher than the 1.5% growth expected by the Office for Budget Responsibility.
We are convinced we will gain visibility progressively around the framework of the future commercial relationship between the UK and the EU and that it will not be unfavourable to the UK. Germany being the UK’s first economic partner (UK accounted for 14% of Germany imports in 2016 against 9.4% for China and 9% for the US), it is unlikely the eurozone would mistreat one of its primary clients.
Since the start of this year, global equity fund managers’ sentiment around the UK remains quite negative, in line with views expressed in 2017. This sentiment translates into being underweight UK equities in their portfolios. But the positive growth of several British companies depends more from the global economy’s health than from that of the UK (mining and industrial stocks,…). As visibility should gradually improve on the UK, we recommend rising allocations to the country progressively.
In respect of currency risk and/or the need to hedge currency risk?
We believe most of the sterling depreciation is behind us. Gaining more visibility on the UK may lead to the appreciation of the sterling. Against the dollar, the sterling has entirely erased its post-Brexit poll drop. Against the euro, the sterling remains 13% below levels seen before the Brexit poll. We do not recommend hedging currency risk.
What do you expect as for UK’s economy as we get closer to the Brexit date?
The imbalance among contributions of various British growth drivers should persist. Households’ confidence worsens since their purchasing power erodes because of the imported inflation paired with sterling depreciation. Manufacturing output remains quite strong, led by the dynamic global growth while the sterling depreciation enables UK industrials to grab market shares in exports. This process that is ongoing since a year should stabilise however thanks to currency exchange: the stabilisation of the sterling and its appreciation against the dollar may slowdown imported inflation.
Which sectors/names in the UK do you favour currently and which ones do you see as possibly benefiting from Brexit?
Since inception of the FDC Brexit fund, we have favoured exporters that benefit from the global growth’s dynamism. We keep this bias, in particular towards mining stocks (Rio Tinto, BHP Billiton, Glencore) since they benefit from growth in commodity prices and oil stocks (Royal Dutch Shell, BP).
Among industrials, we express a preference for undervalued companies whose appealing assets can draw predators. Aircraft and automotive equipment manufacturer GKN was our second lead position in the fund as at end of December 2017 before Melrose Industries launched a takeover bid on it. In that context, Morgan Advanced Materials and Johnson Mattey are some high convictions of the FDC Brexit fund. Smiths Group seems underappreciated whereas the energy market is rebounding.
Regarding domestic stocks that are sensitive to the UK growth dynamism, we hold positions in defensive stocks (Ultra Electronics, Qinetiq) carrying a huge discount in value compared to their US and European counterparts. Another play is Polypipe, that manufactures piping systems, because it builds on the dynamism of home construction in the UK. The country lacks 400,000 houses.