Once again UK investors find themselves living in uncertain times.
Our exit from the EU is likely to take some time and cause endless stress, with a hiatus in capital investment and a squeeze on the consumer looking more likely by the day.
The pound has fallen almost 20 per cent since 24 June and higher inflation now seems inevitable.
Holidaying abroad could once again become a luxury rather than the norm and many of our basic goods are imported whether it be food, electronics, fuel or clothing.
Despite these concerns it has been ‘so far so good’ for UK investors with all of the UK stockmarket indices higher now than before the vote, including the medium and smaller companies that were hit hardest in the immediate aftermath.
Investors have gravitated towards giant companies with significant overseas earnings such as BP, Royal Dutch, HSBC and Glaxo, where the benefits of a weak sterling have been immediately appreciated.
This helps explain the relative strength of the FTSE100 index, which is dominated by multinationals with limited exposure to any slowdown in the UK economy. Such shares have provided a good hiding place as the pound has crumbled.
However, this may not be a sustainable trend with the structural concerns regarding weak commodity prices and large dividend burdens remaining largely intact.
When we look for value in today’s stockmarkets we find ourselves gravitating towards some more home-grown talent, where past achievement has been quickly written off.
UK-centric sectors such as banks, retailers, leisure, real estate and housebuilding have all been hit hard so far, with the vast majority of companies still trading below their pre-Brexit values.
Within these sectors we find a number of well-managed businesses trading at potentially bargain prices.
Berkeley Group is a leading London housebuilder with a significant and valuable landbank that is the envy of its rivals.
The company looks set to pay substantial dividends for several years to come and can afford to weather any storms.
While the retail sales outlook is likely to deteriorate from here, Next has a strong market position in clothing and a history of returning cash to shareholders with its strong balance sheet. Its shares have fallen by almost 40 per cent in the past year.
Greene King, the UK’s largest pub group, has expanded its food operations materially in recent years and has the benefits of the acquisition of Spirit pubs still to come.
The management team has a track record of acquiring well and coping with economic uncertainty.
We have recently added Sky to our list of preferred UK stocks. It remains a leading pay-TV and broadband provider both in the UK and Europe and has a history of technical innovation as well as providing the very best sports and entertainment content.
This does not come cheap but Sky is an integral part of over 11 million households and this seems unlikely to diminish in the near future. As with our other examples the shares have lost most of their shine in recent months.
As we look forward we are wary of investing in assets that appear safe but may be expensive.
Investors in government bonds at today’s elevated prices run the risk of inflation coming back to haunt them.
Over the summer months government bond rates fell sharply, with UK ten-year gilts moving to unprecedented yields of only 0.5 per cent, despite the spectre of Brexit around the corner.
Consumer staple companies trade on the highest ratings in their history, reflecting their defensive earnings.
Our focus now is to look beyond what is currently in favour. We remain committed to investing in smaller and medium companies while acknowledging the need to proceed carefully.
The collapse in the pound may not last forever and things may turn out to be less terrible than currently feared.
We believe we have identified a number of companies serving the UK consumer that have proven track records in managing through tougher times.
In each case their shares have fallen significantly over the past year. With Brexit concerns dominating the economic outlook there is now an opportunity to buy good businesses at prices that are highly attractive for patient, long-term investors.
Scott McKenzie is an investment director at Saracen Fund Managers
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