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Mark Barnett: Brexit deal could lift lowly UK stocks

Invesco fund manager says he is now more convinced a deal will be secured, potentially lifting downtrodden UK domestic stocks.

 
Mark Barnett: Brexit deal could lift lowly UK stocks
 

Mark Barnett, manager of the Invesco Perpetual Income and High Income funds, believes a Brexit deal for the UK is now looking more likely, and could provide a lift to lowly-rated UK domestic stocks.

Yesterday's news of the outlines of a transition deal between the UK and the European Union was welcomed by investors, who sent the pound rallying.

Barnett said while the market was likely to be jumpy as negotiations on a final agreement continued, he expected a deal would be done.

'I am more convinced now we will get a deal,' he said, adding that it could prompt investors to reassess the 'overly pessimistic consensus' on UK stocks with a domestic focus.

'It may be the catalyst for the reappraisal for UK domestic companies, he said. 'The economy to my mind is set pretty fair.'

Barnett has been drawn to domestic UK stocks as they have been shunned by others investors following the vote to leave the European Union.

But with those areas of the market remaining out of favour, Barnett has continued to endure a tough period of performance, with his Income and High Income funds languishing towards the bottom of the UK All Companies over the last 12 moths, both down by more than 6%.

Heavy share price falls from major holdings like Provident Financial (PFG) and Capita (CPI) have been among the biggest drags on performance.

Next (NXT) is a top 10 holding in both his Income and High Income funds, and the manager also flagged the relative cheapness of real estate investment trust holdings like Derwent London (DLN), Shatfesbury (SHB) and NewRiver (NRRT).

Barnett acknowledged that Next, whose shares are down around 30% over the last two years, had suffered from 'some problems of their own making', but said he did not buy the argument that all retailers with a high street presence would be doomed by online shopping.

'The market has taken a pretty gloomy view on the outlook for this business,' he added.

The manager is also happy to wait for dividend growth from oil giants BP (BP) and Shell (RDSa), both top five holdings in his flagship funds, as both offer yields of more than 6% in the meantime.

He pointed to Shell's scrapping of its scrip dividend programme, under which shareholders were given the option of receiving their payout in extra shares. BP has meanwhile pledged to resume share buybacks to offset scrip dividends.

'BP and Shell have taken step one, by neutralising or eliminating the scrip,' he said.

'The next step for both of these companies will be growth in dividends. The market though is still sceptical of their dividend growth potential.'

Barnett added he was alive to the fallout from Carillion's collapse, and its potential impact on dividend payments from companies struggling with big pension deficits.

With Carillion the latest high-profile failure of a company with a large pension deficit, he acknowledged companies with weaker pension schemes could respond to pressure to top them up, potentially at the expense of dividends.

'The aftermath of the Carillion bankruptcy is working through the system,' he said. 

'We are conscious of the companies where there are big pension deficits in out portfolio. It's not something we're not aware of and we're not questioning our portfolio companies about.'

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