Why now is a good time to buy - TM CRUX UK Special Situations Fund
Since the start of this year, it feels as though the United Kingdom has been constantly engulfed by gloomy news stories, with a particular focus on inflation and how (or not) the Bank of England has combated this via an increase in interest rates, from 0.1% in December 2021 to 1% in May. The environment that had become the norm, was not normal at all, with interest rates having been kept artificially low. We believe these changing market conditions provide opportunities as the market pivots.
"The UK stock market is not the UK economy. While there are justified concerns over the state of the UK consumer, 65% of revenues within the UK stock market are derived from non-UK earnings."
The rise in interest rates has been clearly negative for growth stocks. Within the UK market, growth at any price is no longer rewarded; the market is rotating towards one that rewards growth at reasonable prices (GARP) and value.
Over the long-term the UK market has consistently underperformed against the MSCI World Index; since the start of 2022 this has begun to change.
We believe there are four key reasons why now is a good time is to invest in the UK market.
- The UK stock market is not the UK economy. While there are justified concerns over the state of the UK consumer, 65% of revenues within the UK stock market are derived from non-UK earnings. In 2016 when the Brexit referendum result to leave the EU was realised, Sterling fell and boosted the value of overseas earnings. This, counter intuitively, meant there were more profits for investors in the UK stock market.
- Bad news has already been priced into the UK domestic stocks, especially within the retail and house-builder sectors. Vistry Group, a British housebuilding company, has seen its share price decline by c.30% this year. This, despite recently reporting a strong trading update and expecting FY22 profits before tax to be at the top end of consensus, with a c.20% increase on profits pre tax when compared to FY21. Another example is JD Sports whose share price over the past 6 months has almost halved. While previously not a stock held in the TM CRUX UK Special Situations Fund, we now see an opportunity and have been selectively building a position in the company.
- Good news doesn’t sell newspapers. While headlines have been dominated by the increase in interest rates, the 10-year mortgage rate has barely moved, and almost 70% of mortgages are fixed. Unemployment is also at its lowest level since 2007 and there are over one million job vacancies. Salaries are predicted to rise 5-7% this year and there are shortages of both skilled and unskilled labour across white and blue-collar sectors. This ‘bad news’ must be seen in context – this is not the same as 2007.
- Stock picking opportunities. Company specifics can still triumph over the major headwinds. Long term growth, electric vehicles, and gene therapy opportunities are still out there, just cheaper than before. The ongoing volatility in markets provides opportunities for many of the types of companies that fund manager, Richard Penny looks for.
"Long term growth, electric vehicles, and gene therapy opportunities are still out there, just cheaper than before."
By having a focussed, agile, valuation driven fund that targets the whole of the UK market, the TM CRUX UK Special Situations Fund is able to take advantage of the prevailing market conditions in the UK, with a similar approach working to strong effect in similarly uncertain periods, such as in 2020, 2008 and 2003.