Currency is the biggest immediate risk to UK investors, James Hambro & Partners’ James Horniman says, adding that last year’s boost to the FTSE 100 on the back of weak sterling was “a one-off bonanza”.
Partner and portfolio manager Horniman says the implications of Brexit are still unknown a year on from the referendum, while equity markets are becoming desensitised to political shocks.
“A number of scenarios are possible – from talks breaking down and no deal being agreed – which would be pretty calamitous for Britain and not pleasant for Europe either – to something close to what we have now. The key for us is that whatever is agreed supports free trade and respects free movement of people – in other words, that it is good for the economy.”
Horniman says sterling could go either way, with “a good divorce” strengthening it but a bad or no deal weakening the pound.
Although many investors in the FTSE 100 benefited from weak sterling last year due to the large number of multi-nationals in the index generating income in overseas currencies, Horniman says if the pound falls again it will further impact inflation.
“This was a one-off bonanza. Since then sterling has recovered a little but we have seen the impact of currency on inflation. If it drops again and further it might be good for exporters and multi-nationals but it will continue to make imports more expensive and that is likely to fuel inflation further. It may lead to an increase in interest rates as attempts are taken to shore up the currency and that could take some of the heat out of a recovery that is only just warming up.”
Horniman adds that although stronger sterling would be detrimental to FTSE 100 returns, it would be better for the overall economy, keep inflation in check and may be better for small and mid caps.
With UK equity markets showing little reaction to the news of a hung parliament, Horniman says they are “feeling like a one-way street at the moment”, and their “irrational exuberance” could be a sign that a bear market is imminent.
Although Horniman describes the UK as “the sick man of Europe”, he is remaining cautiously positive on the economic recovering and improving earnings. However, the UK exposure to the JH&P Mandate 3 portfolio has been reduced from a typical 35 per cent to 31 per cent, with the emphasis on firms with greater exposure to international earnings.