BARCLAYS | Heading into 2016, aside from the current market weakness, UK equity investors face at least five important questions:
1) Is the UK consumer retrenching? While we had concerns last year, the recent weakness in domestic UK consumer stocks looks overdone to us. A cocktail of low oil prices, low rates, a softer than expected fiscal stance, resilient consumer confidence and wage growth should support discretionary spending.
2) Is there any value in “value”? While value investors have had a tough time, we think there is now an opportunity to buy stocks with high dividend yields and low PEs (basket on page 7). “Quality” stocks on the other hand, look very expensive.
3) Should we be wary about wages? Although higher wage growth should support discretionary spending, it presents a ch allenge for those domestic UK companies where salaries are a high pr oportion of the cost base.
4) Are there any sectoral opportunities? To us, Financials, Consumer Discretionary, Real Estate stocks, as well as Energy look underpriced, while Staples look expensive.
5) How worried should we be about BREXIT? Interestingly, polling evidence suggests a degree of conditionality in UK attitudes towards the EU. If the UK government can recast the UK’s relationsh ip with the EU, the risk of a BREXIT should fall. On the domestic consumer side, we are adding Redrow, ASOS, Betfair, Tesco and Britvic to our UK recommended portfolio, wh ile we think there are value opportunities in BP, Royal Mail, Synthomer, Aviva, SSE and Spectris