INVESTMENT STRATEGIES UK DOMESTIC
“
Retailers that
keep their nerve and
focus on adapting to
changing buy ing
habits will be the
ones that survive
the current eco nomic
challenges
”
Phil Duffy, partner, MCR
BY JAMES SMITH
Anyone reading about UK
equities in the past few
years could be forgiven for
thinking exposure to overseas
earnings is all that
matters.
Across the UK sectors,
the majority of managers –
whatever their size bias –
have been talking up their
stocks’ international presence,
with domestic profiles
largely ignored. But
UK investors have always
maintained a strong local
bias and recent sales data
shows a rush to what they
see as safer assets amid
ongoing eurozone turmoil.
While we should not
extrapolate too much from
short-term numbers, IMA
figures for September
showed UK Corporate
Bond and UK Equity
Income as the top-selling
sectors and Asia ex Pacific
suffering the worst outflows
– although for balance, it
must be noted that UK All
Companies was also deep
in redemption territory.
This shows ongoing
faith in our home market
and, with companies
enjoying overseas exposure
becoming an increasingly
crowded trade, are
domestic-focused stocks
worth another look?
l Quickened pace
Before analysing this, it is
worth considering the revenue
breakdown of
European companies in
more detail. Recent analy-
sis from Morgan Stanley
shows stocks have diversified
exposure away from
their home markets at the
fastest ever pace in the
past two years. Earnings
from emerging markets in
particular has increased
from 12% in 1997 to 29%
today, with home countries
now only accounting for
53% and expected to fall
further in coming years.
Morgan Stanley analyst
Matthew Garman says
energy, IT, healthcare and
materials are the most
global sectors, while real
estate, retailing and utilities
tend to be the most domestically
exposed.
“Energy, semiconductors,
tech hardware, consumer
durables, food, beverage
and tobacco all
obtain over 70% of their
revenues from outside
developed Europe,” he
explains. “At the opposite
end of the spectrum, real
estate is the least geographically
diversified
sector, where 95% of revenues
come from home
markets.”
l Consumer is key
In terms of revenue breakdown,
consumers account
for 47% of Euro pean revenue,
corporate expenditure
45% and government
spending the remaining
8%. So it is little surprise
most of the concerns about
domestic UK stocks lie in
their consumer exposure.
At a big-picture level,
Capital Economics predicts
retailers’ sales will suffer as
they have to increase
prices, forcing them to
absorb higher costs into
their margins instead. But
this hides stronger areas,
with food sales relatively
immune to the effects of
the fiscal squeeze and
pubs and restaurants –
having already suffered a
The FTSE 100 as a play on overseas ear
that is both well understood and has arg
but where should you invest if you want
domestic UK?
Home advant
cut in spending – likely to
be less vulnerable to further
falls.
Other commentators
suggest the retail sector
simply has to change to
keep up with rapidly evolving
consumer behaviour.
Phil Duffy, a partner at
restructuring specialist
MCR, says many consumers
now want a choice of
shopping – in-store, by telephone
and online.
“Retailers that keep their
nerve and focus on adapting
to changing buying
habits will be the ones that
survive the current economic
challenges,” he says.
l Small caps
Broadly speaking, Morgan
Stanley’s research shows
small caps are most
dependent on their domestic
economies while emerging
market exposure is
highest in mega caps.
While this might seem
obvious, many smaller
firms offer niche products
with global applications
and several managers in
this area are just as focused
on overseas presence.
One exception to this
is Henderson Fledgling
Trust manager Harmesh
Suniara, who highlights
domestic opportunities at
the smallest end of the
market. He says that, as a
result of index changes,
the proportion of FTSE
Fledgling company sales
originating from overseas
has decreased significantly
in the past year, from
40% to 16%.
He says: “Conventional
16 PORTFOLIO ADVISER [www.portfolio-adviser.com] JANUARY 2012
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