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Is it all doom and gloom for UK domestic cyclicals?

The UK is leaving the EU and economic growth is slowing.

The case for UK domestic cyclicals – those businesses whose earnings rise and fall in-line with the broader economic cycle - could be considered as poor as a Conservative election campaign.  Indeed domestic cyclicals have materially underperformed since Brexit, but is it all doom and gloom or has it created a longer term buying opportunity for some good quality albeit cyclical businesses?

One of the key considerations in our investment process is valuation; or in other words, what the current share price implies about the quality of a business and its future prospects.  I agree that the outlook for the UK is uncertain but I would also argue the risks are already well known and hence valuations reflect this uncertainty.  The chart below shows the valuation of UK domestic cyclicals compared to the UK market.  As you can see domestic cyclicals are the cheapest they have been relative to the market since the last recession.  Remember that was the worst recession for a number of decades.  Are things really that bad?  Unemployment is low, consumer leverage remains below previous peaks while there seems to be signs of wage growth.


In recent weeks we have seen results and trading updates from domestic companies such as Next and Pets at Home.  Both delivered what can only be described as remarkably in-line statements with no change to analysts’ earnings forecasts.  Despite this, both share prices were up strongly on the day of their results showing how far sentiment and valuations had fallen for these companies.

Although the fears over the UK economy may play out, I feel the share price underperformance in certain domestic companies has presented an attractive buying opportunity for some good quality albeit cyclical businesses. 

Two examples are Whitbread and Lloyds.  Whitbread, owner of Premier Inns and Costa Coffee, has leading market positions, strong brands, a robust balance sheet and is underpinned by freehold property.  The company still has good opportunities to expand the business through the roll-out of its key brands which should drive higher profits over the longer term.  Although short term trading concerns have put pressure on the share price this has created a compelling chance to own a high quality franchise on an attractive valuation. 

Lloyds has transformed itself from the previous downturn into a well-capitalised bank generating good returns and attractive cash flow.  Despite fears over pressure on margins given the low interest rate environment, the bank continues to grow net interest margins - the difference between the interest it pays to its lenders (i.e. depositors) and the interest it receives from its borrowers - while producing excess capital.  With the management team promising the return of this excess capital via special dividends, shareholders could be in line for a cash return of close to 8%.  Not a bad starting point even if the UK economy slows.

So while there are uncertainties around the UK economy it’s important not to throw the baby out with the bathwater. The underperformance of domestics has created good buying opportunities in some good quality UK companies, and we hope our investments in these areas will enable us to delvier long term performance to our clients. 

The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services.

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Jeremy Corbyn supporters should stop excusing Labour’s anti-immigration drift

The Labour leader is a passionate defender of migrants’ rights – Brexit shouldn’t distract the new left movement from that.

Something strange is happening on the British left – a kind of deliberate collective amnesia. During the EU referendum, the overwhelming majority of the left backed Remain.

Contrary to a common myth, both Jeremy Corbyn and the movement behind him put their weight into a campaign that argued forcefully for internationalism, migrants’ rights and regulatory protections.

And yet now, as Labour’s policy on Brexit hardens, swathes of the left appear to be embracing Lexit, and a set of arguments which they would have laughed off stage barely a year ago.

The example of free movement is glaring and obvious, but worth rehashing. When Labour went into the 2017 general election promising to end free movement with the EU, it did so with a wider election campaign whose tone was more pro-migrant than any before it.

Nonetheless, the policy itself, along with restricting migrants’ access to public funds, stood in a long tradition of Labour triangulating to the right on immigration for electorally calculated reasons. When Ed Miliband promised “tough controls on immigration”, the left rightly attacked him.  

The result of this contradiction is that those on the left who want to agree unequivocally with the leadership must find left-wing reasons for doing so. And so, activists who have spent years declaring their solidarity with migrants and calling for a borderless world can now be found contemplating ways for the biggest expansion of border controls in recent British history – which is what the end of free movement would mean – to seem progressive, or like an opportunity.

The idea that giving ground to migrant-bashing narratives or being harsher on Poles might make life easier for non-EU migrants was rightly dismissed by most left-wing activists during the referendum.

Now, some are going quiet or altering course.

On the Single Market, too, neo-Lexit is making a comeback. Having argued passionately in favour of membership, both the Labour leadership and a wider layer of its supporters now argue – to some extent or another – that only by leaving the Single Market could Labour implement a manifesto.

This is simply wrong: there is very little in Labour’s manifesto that does not have an already-existing precedent in continental Europe. In fact, the levers of the EU are a key tool for clamping down on the power of big capital.

In recent speeches, Corbyn has spoken about the Posted Workers’ Directive – but this accounts for about 0.17 per cent of the workforce, and is about to be radically reformed by the European Parliament.

The dangers of this position are serious. If Labour’s leadership takes the path of least resistance on immigration policy and international integration, and its support base rationalises these compromises uncritically, then the logic of the Brexit vote – its borders, its affirmation of anti-migrant narratives, its rising nationalist sentiment – will be mainlined into Labour Party policy.

Socialism in One Country and a return to the nation state cannot work for the left, but they are being championed by the neo-Lexiteers. In one widely shared blogpost on Novara Media, one commentator even goes as far as alluding to Britain’s Road to Socialism – the official programme of the orthodox Communist Party.

The muted and supportive reaction of Labour’s left to the leadership’s compromises on migration and Brexit owes much to the inept positioning of the Labour right. Centrists may gain personal profile and factional capital when the weaponising the issue, but the consequences have been dire.

Around 80 per cent of Labour members still want a second referendum, and making himself the “stop Brexit” candidate could in a parallel universe have been Owen Smith’s path to victory in the second leadership election.

But it meant that in the summer of 2016, when the mass base of Corbynism hardened its factional resolve, it did so under siege not just from rebelling MPs, but from the “Remoaners” as well.

At every juncture, the strategy of the centrist Labour and media establishment has made Brexit more likely. Every time a veteran of the New Labour era – many of whom have appalling records on, for instance, migrants’ rights – tells Labour members to fight Brexit, party members run a mile.

If Tony Blair’s messiah complex was accurate, he would have saved us all a long time ago – by shutting up and going away. The atmosphere of subterfuge and siege from MPs and the liberal press has, by necessity, created a culture of loyalty and intellectual conformity on the left.

But with its position in the party unassailable, and a radical Labour government within touching distance of Downing Street, the last thing the Labour leadership now needs is a wave of Corbynite loyalty-hipsters hailing its every word.

As the history of every attempt to form a radical government shows, what we desperately need is a movement with its own internal democratic life, and an activist army that can push its leaders as well as deliver leaflets for them.

Lexit is no more possible now than it was during the EU referendum, and the support base of the Labour left and the wider party is overwhelmingly in favour of free movement and EU membership.

Jeremy Corbyn, John McDonnell and Diane Abbott are passionate, principled advocates for migrants’ rights and internationalism. By showing leadership, Labour can once again change what is electorally possible.