Looking for long-term opportunity amid short-term volatility

At a glance 

Selling shares when markets are low could see you miss any price bounce back. 

Market uncertainty can provide long-term opportunities for savvy fund managers to exploit. 

Relatively cheap UK options could offer value in the post-pandemic world. 

Since the pandemic began to subside at the end of 2021, the investment world has seemingly gone from one complication to another. 

First, inflation began to rise as supply chains struggled with the reopening. Last year, Russia invaded Ukraine. Interest rates have continued to rise through 2022 and 2023 and, as this year has progressed, a number of banks have begun to fail. 

In times of uncertainty, there is an instinct to sell up and wait out the economic storm. We believe this is not the optimal choice. Because of inflation, money held in a bank account will inevitably lose purchasing power over time.  

Milena Mileva, a fund manager at Baillie Gifford, says that market uncertainty presents fund managers with opportunities. She notes: “When there are loads of negative headlines, the temptation is to focus on what is happening at the minute and not properly think long-term. This reveals some terrific opportunities for patient investors, and we’ve been taking advantage of them.”  

Ian Lance, of fund manager Redwheel, provides an example of this: “During the pandemic, believe it or not, the share price of NatWest Bank was lower than it was when the UK Government stepped in and nationalised it during the financial crisis. So, if you’re able to take a long-term view, there are some amazing opportunities.” At the time of writing, even with the recent negative banking headlines, NatWest shares remain over double their 2020 lows.  

While things might appear difficult right now, it is impossible to fully understand the more medium- and long-term results of every recent event. Milena points out: “The last two years, if nothing else, should have given anyone who makes bold proclamations about what everything means, and how it will all work out, a reason to pause and reflect. It really has shown the limits of our predictive powers.”

UK outlook

The UK is a prime example of this. The FTSE 100 has many so-called ‘old-world’ companies in sectors such as oil, gas, and financials. For much of the past 15 years, these types of companies have been out of fashion, as rapidly growing tech companies hogged the headlines.

According to Milena, the poor sentiment around the UK has provided some investment opportunities. She says: “There are some UK companies that are very attractively priced and are genuinely world leading. There are some exciting opportunities, you just have to go out and find them, back them with conviction and then hold them for a long time.”

It is important to remember that the majority of FTSE company earnings come from outside the UK. Even if the UK economy continues to struggle, there are plenty of UK based companies that can still prosper through their international operations.

Like the UK, dividends have been out of fashion in recent years. Ian notes, “We went through a period in the 2010s where markets were going up so much per annum many people almost forgot about dividend yield. They thought: ‘Who needs dividends when you can just sell some capital every year?’”

However, as the markets shift in a post pandemic world, the situation might begin to change again. According to Ian: “If you look at the very long term, dividends generally tend to make up about half of your total return. In the 2010s, they were about 17% of total returns – almost to the point where you could ignore them. If we’re moving to an environment where you can’t rely on markets growing so rapidly – and I do think we’re moving to that environment – then once again dividend yield becomes more important to your total return.”

Emerging opportunities

Large oil and gas companies are traditional dividend-payers that saw their share prices surge last year on high fuel prices. Even at these higher prices, Ian believes there remain opportunities in this sector, as governments look to shift away from traditional fuels before we can generate sufficient newer forms of energy to replace them.

“Energy is the area we’re most excited about. We globally started to turn off the old energy system before the new energy system was ready to take over,” Ian says, and adds, “In 2013, the big oil companies used to spend about £600 billion finding new oil. Now it is £200 billion. What’s the impact of that? Last year we found about a third of the oil we consumed, so we’re not replacing our oil at the moment. That tells you energy prices are likely to remain high unless capital expenditure from these companies picks up.”

Ian hasn’t seen capital expenditure sufficiently pick up as yet, because many companies are being encouraged not to invest in fossil fuels and are facing windfall taxes. Instead, he says: “The bulk of them are doing the same thing – keeping capital expenditure low, paying big dividends, and doing share buybacks. And despite this, the valuations remain cheap.”

This is not the only potentially exciting area for investors. Milena sees an opportunity in digital enterprise IT spend – and there are a number of UK businesses well positioned in this area.

“Longer term, the huge amount of data and AI, and what we do with it, is very exciting. It’s still early stage, but if you have a longer-term time horizon it is extremely interesting – right across the market cap spectrum,” she adds.

The opinions expressed are those of the individuals quoted and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research, or advice. The views are not necessarily shared by other investment managers or St. James’s Place.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

An investment in equities does not provide the security of capital associated with a deposit account with a bank or building society.SJP

SJP Approved 29/03/2023