Brexit failing to deliver for Investec special situations manager

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Investec UK equities manager Alistair Mundy says retailers hit by squeezed households are one of the few sectors where Brexit could create opportunities for his special situations fund as he admits value continues to struggle.

Retail figures released by the ONS today showed their first annual fall since March 2013, dropping 0.3 per cent. Real wages are falling 0.8 per cent, according to ONS figures released this week.

Mundy says: “The UK consumer is struggling at the moment and we’ve seen a few profit warnings from smaller retailers. If that became more of a trend or if there was a warning from a mainstream retailer that would really hit market sentiment further.”

The Investec UK Special Situations fund has added to Next this year, where Mundy says investors hold bottom-up concerns on top of top-down worries. He reckons Next can compete with fast fashion and has a good directory and online business.

The £1.1bn fund waits for share prices to underperform 50 per cent before looking at them. It is fourth quartile over every time horizon up to five years, according to FE data, and Mundy admits value is struggling, particularly in the UK.

Value turns seriously when bond yields turn and it’s not about what you own it’s what you don’t own. It’s the stocks that have become most correlated to bond yields that we think are vulnerable.”

The fund has returned 18.5 per cent over the last three years compared to 29.1 per cent in the IA UK All Companies sector.

Mundy says ongoing uncertainty around Brexit has failed to deliver many opportunities. “We’re doing more looking than buying,” he says.

However, politicians could continue to drive down sentiment and create opportunities, Mundy says. “They seem to be doing their best to confuse us at the moment.”

Invesco UK Equities fund manager Martin Walker lists Sainsbury’s and Marks and Spencer as current value plays in the UK retail market.

In aggregate, valuations for UK domestics have de-rated to global financial crisis lows, supporting a view that even a modest improvement in the outlook for the UK, sterling or the consumer may be enough to prompt some better performance,” says Walker.

Share Centre investment analyst Ian Forrest advises investors to remain cautious about the retail sector until sales and profit margins improve.

“They should focus on companies which are embracing online and mobile retailing, in particular those that have established a niche for themselves and so do not face fierce competition as is the case in the supermarket sector.

“Longer term the prospects may improve for retailers generally as inflation is expected to ease down next year,” Forrest says.