(MENAFN- Khaleej Times) I have tried to visit Britain on the eve of every general election since the end of the Thatcher era (by Tory regicide, not the ballot box) in November 1990 in search of insights to help me trade sterling, gilts and UK equities. So the Year of the Goat (Lloyd George?) will also be the year of another trek to Londonium, the City that has fascinated, enthralled and nourished all my adult life in the markets.
As the Fed hikes interest rates in the US, I expect the waves of global liquidity to get turbulent, with higher credit spreads and liquidity premia. A Marxist Leninist as the Greek Prime Minister and 500-year lows in German Bunds yields do not exactly make me optimistic about Europe, despite Super Mario. The Footsie 100 index, thanks to its mining and financial weighting, has not been the stellar market in Europe. However, Britain's valuations have derated since 2014, thanks to the plunge in oil prices, China's growth angst and deflation in Europe. So have prospects for earnings growth. However, I cannot ignore a market where the dividend yield is 3.9 per cent and dividend growth could be seven-eight per cent next year as David Cameron and George Osborne go to the nation for the prize of continued residence on Downing Street. The High Street is on a roll, as wage growth and the jobless rate demonstrates. The Bank of England will follow the Fed in a monetary policy move, which means sterling (cable) bottoms near 1.52 or so, as in 2010. Domestic growth companies in the UK will be rerated.
Strangely enough, defensive firms such as Imperial Tobacco, publisher Reed Elsevier and medical equipment vendor Smith and Nephew have all been rerating, an omen of things to come next year. I believe UK banks (yes, Lloyds, RBS and Barclays) will no longer be the Cinderellas of international finance. London property is another attractive investment theme, notably by freehold lease arbitrage in South Ken and Chelsea. Of course, the general election will create huge volatility in home builders and UK home prices, utilities, gaming firms and transports since the Labour leader Ed Milliband has been the most ungrateful brother in Brit history since Edward IV's Duke of Gloucester (the future Richard III). The Tories do regicide but Labour does fratricide. Politics will create serious opportunities to make (or lose money) in the UK next year.
My favourite sector in Britain is banking, where a vibrant High Street, a steeper gilts yield curve, a brutal restructuring, a new focus on core strategy and strong regulatory capital means excellent potential for a valuation rerating. I would highlight Barclays as a UK bank that will outperform in 2015 and love its distressed valuations at 0.84 times book value, 7.6 times earnings and a dividend yield of 4.2 per cent. As volatility rises in currencies and interest rates (it will), as takeover mania sweeps the City (it will) as management runs down non-core and Bob Diamond era Barcap investments, as the Libor manipulation scandal passes into history, Barclays will be my "Citigroup" proxy in the sceptered isle. Litigations/settlements are a sword of Damocles on all global banks and Barclays is no exception, notably in forex. As the Yellen Fed moves, the dollar yield curve turns steeper and rate vols spike higher, nirvana for Barcap.
Anthony Jenkins has reinvented Barclays with a shift to UK High Street banking and Barclaycard businesses with a ROE of 14-15 per cent. Barclays is on the eve of an epic "free capital" theme comparable to Citi Holdings in 2012, when I turned bullish just as Vikram Pandit was ousted and shares traded at 28. The biggest risk? The CFTC and FINMA have not settled with Barclays. So I quote Lord Carrington (Peter, not Rupert). The Queen is at Ascot. The Tories are in power. All's well with the world.
Researched and compiled by Matein Khalid. Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae
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