Non-Dividend Investment ideas for UK Equities Post Brexit

The year 2019 has been a particularly fruitful year as far as income seekers are concerned for stocks listed on the London Stock Exchange. This year most of the dividend payers have created a record of sorts by not only paying dividends at higher rates but have also paid special dividends making the investors cash rich. This brings to the fore the question- are dividends the only investment idea for this season or there are other ideas that we may be overlooking in the midst of this euphoria. With most people overlooking, even if there is one or more, these could be excellent opportunities for an investor to create value.

The business and economic landscape which is now prevailing in the United Kingdom is quite different from what it was in the month of September or October of 2019. A number of uncertainties and negative economic headwinds that had gripped the British economy have now subsided, and the leading economic indicators that some time back were pointing downwards are now showing signs of stability. All this along with the monetary and fiscal policy measures taken by the British establishment some time ago promise to make the business environment in the country expansionary and attractive. The foreign institutional investors, who were for so long sitting on the fences because of the choppy business environment, have now signaled their intentions to start bringing in more funds into the equity markets in the UK.

There are a few things that are worth noting about dividends that one needs to keep in mind while considering dividends as an investment idea. Investment strategy geared towards dividend income is a passive strategy and is beneficial most when active strategies are not yielding good returns on account of a certain adverse macroeconomic events that may be affecting the markets. However, these are also the periods when active value seekers look for good investment ideas which, at present, could be trading cheaply on account of the subdued market sentiments. High dividends do not always mean superior prospects of a company. Looking at it from a wider perspective, a company paying a large dividend is not expecting nor is in possession of growth opportunities and, therefore, resorting to paying off cash just to retain the investors’ interest in the stocks of the company. This could also be the case if a company wants to postpone any of its growth or capital expenditure activities on account of an economic slowdown or an adverse macroeconomic event of similar magnitude. The past several months have particularly been turbulent for the companies listed on the London Stock Exchange with the only bright spot being the high dividend yields that investors have received. With the same line of thought, it follows that this trend is not sustainable as capital expenditure programs that had been put on hold by companies in the recent past will now have to be implemented.

The investment ideas that at this time carry the maximum value creation potential are growth ideas, or stock ideas which have considerable price rise potential. The sectors that would be reviving after the Brexit event and which have taken extensive steps to counter disaster in the pre-Brexit phase, would be the ones which will be seeing the maximum recovery. Other than that, industries which are highly sensitive to interest rates would also be the ones which will be seeing the maximum growth in the post-Brexit period. The factor that had been the responsible most for the weakening of the capital markets in the United Kingdom in the pre-Brexit era was the weak British Pound Sterling, which at this time, however, is still under tremendous pressure and would continue to be so for some more time.

Export-oriented companies and retail companies traditionally are the ones that recover fast when an upturn in economic cycle occurs. Improved consumer sentiments immediately augment the prospects of the consumer discretionary sector while the benefit in the other sectors is derived as a cascading effect. Export-oriented companies will benefit from the weak pound sterling and the push given to British manufactured goods when it is cheaper for the foreign buyers to buy them. Of course, there will always be companies that have significant business operations outside of the United Kingdom and bring in significant foreign currency denominated revenue into the British economy. These companies also face significant growth prospects on account of the improving macro-economic environment in the entire European Union area which has also been equivalently affected by Brexit.

The industries which may not recover so well would be the banking and financial services industry and the manufacturing industries. Brexit is bound to bring about increased restriction on the movement of manpower across the European Union. This is a critical factor in the operations of both the above industries. For the banking sector, the restriction in movement of professionals freely from one place to another will lead to offshoring of business processes to client territories, which in the short run will lead to curtailment of business and in the mid term will make operations more expensive. The manufacturing sector in United Kingdom also has benefited immensely form highly skilled manpower coming from other European countries who often work at discounted wage rates than that would need to be paid to the citizens of the United Kingdom. The industry also benefited from the quality of industrial base available in the rest of Europe which often supplied quality machinery and components to the British industry at competitive rates. With Brexit taking place, there will now be greater tariffs on the importing of these goods which will lead to increase in input costs for these countries. Moreover, European Union was also the largest destination for British goods and services, which would now become more expensive to buy on account of increased tariffs.

There are a barrage of good investment ideas to look out for as United Kingdom transitions through the 12 December 2019 general elections and the January 2020 Brexit events. Now is perhaps the best time to start pondering on those ideas if one if planning for a one year to five-year investment time horizon. Major global fund houses and managers have unanimously stated that in the coming season British equities would be the best investment ideas globally. The fortunes of the British Pound will also enhance significantly as the larger economic indicators of the British economy improve further, which will also give a push to the equities listed on the London Stock Exchange. Dividends, though the flavor of the season, were more so on account of the weaker returns coming from other investment avenues. But with improving business conditions, the returns from these alternative ideas will soon surpass the yields that the investors are enjoying in the current period. The investors, however, should trade wisely during this transition period as the risks are also highest during such periods.