On the stock market, it can sometimes pay to be ‘greedy when others are fearful’ – so go the famous words of Warren Buffett, the octogenarian chairman of US conglomerate Berkshire Hathaway and one of the world’s most famous investors.
Fearful is exactly what many investors and business executives are about Brexit and its supposed impact on the UK. Almost every day brings a grim warning about the possible consequences of ‘no deal’.
Could it be that investors are currently too fearful and that there are opportunities for those brave enough to take a different view?
FLAG FLYING : Luxury car maker Aston Martin floated on London Stock Exchange, last month
The pound famously fell heavily on referendum results day and it remains 20 cents, or 13 per cent, down against the dollar. Less well-known is that the UK stock market has also found it hard going.
For instance, in the past year, the FTSE 100 index has underperformed the US S&P 500 Index by 13 per cent and the MSCI World Index by 7 per cent.
Russ Mould, investment director at broker AJ Bell, sums it up: ‘The UK’s stock market has three things going for it. It is unloved after a period of poor performance relative to its global peers. It is potentially cheap because it is unloved. And its currency is cheap.’
For investors who decide this might be the moment to bag a bargain, where can they find the best of British?
Big names on the stock market
THE FTSE 100 index of the UK’s leading shares boasts some quintessentially British names such as BT, BP and Burberry.
Luxury car-maker Aston Martin floated on the London Stock Exchange last month and hopes to drive its value high enough to enter the top 100 Index eventually.
But the reality is the majority are international behemoths that generate up to two thirds of earnings from overseas.
There are some more domestically focused companies that earn strong profits from the UK market, such as Whitbread.
Chris Kinder, portfolio manager at investment group Columbia Threadneedle, says: ‘We bought Whitbread shares at an attractive price earlier this year on the basis that its Premier Inn chain – one of the UK’s largest budget hotel chains – is likely to prosper in a low-growth environment.
‘We believe this low-cost provider may be a Brexit winner if the consumer is slightly more cost sensitive.’
The firm started building a position in April 2017 at £39 per share. Last week, Whitbread was trading at £46.
The FTSE 100 is also popular with income seekers as many companies are paying generous dividends – on average 4.5 per cent. This beats the paltry returns on cash in the bank.
According to The Share Centre, sharebuyers have been keenly purchasing National Grid (average price £8 in the last month), attracted by its dividend yield of 5.4 per cent.
Royal Mail (average price £3.60 in the last month) has also been in demand with a 6.9 per cent dividend yield.
Retail bonds pay fixed returns
Many large and middle-sized firms raise cash to expand their business by issuing ‘retail bonds’. Bonds are essentially loans made by investors to a company for a set period. The bondholders are promised a fixed rate of interest called a coupon.
Unlike shareholders, bondholders do not own a stake in the company. But they can buy and sell bonds on the stock market.
Investors’ original capital is returned at the end of a fixed period, so long as the company is in good financial health. Retail bonds can sometimes offer a more comfortable ride than shares in the same company.
Ed Monk, investment expert at Fidelity International, explains why. He says: ‘Investors can back the British retail stalwart Tesco with a minimum investment of just £1,000, via its Tesco plc bond maturing in 2033.
‘For equity shareholders in Tesco, the last few years have been painful as the company suffered a worsening retail environment and competition from discount rivals.
‘Bondholders have not had to worry in the same way. They do not need Tesco to dominate UK retail as it once did, they only need it to survive and keep paying its coupon.
The total return on offer – known as the redemption yield – is 3.9 per cent, which may not tempt those wanting all out growth from an investment. But it has a current return of 4.6 per cent which will attract income hunters.’
Riskier mini-bonds can offer more
UK companies which do not want to meet the costs and red tape involved in issuing standard retail bonds often issue bonds direct to investors instead.
Since these so-called ‘mini-bonds’ are not traded on any stock market they need to be bought at launch and held to maturity.
A recent bond launch still open for investment is from Chilango – the UK-based Mexican fast food chain.
Dubbed Burrito 2, it promises 8 per cent interest a year for four years on a minimum investment of £500 with extra perks such as free burritos.
The company has already attracted £1.8 million of its £2 million initial target funding, with the closing date December 2. Mini-bonds come with a wealth warning.
The high rates of interest are necessary because investors are vulnerable if the borrowing company gets into financial trouble. Bondholders are at the back of the queue of creditors if the company folds.
Smaller companies can lift returns
Smaller and medium-sized companies (listed on the FTSE 250 Index) generate up to two thirds of their revenues from the UK.
Haig Bathgate, head of portfolio management at wealth manager Seven Investment Management, warns that they can be riskier but are well placed to benefit from an economic upturn.
He says: ‘These companies are at the coalface of the British economy and tend to perform better over the long term than larger companies.
‘Many have put spending on hold as they await an outcome on Brexit, so we may also start to see investment in the UK pick up as this gets resolved.’
Investors can spread the risk by buying a specialist fund or investment trust. Bathgate likes Aberforth Smaller Companies that owns a portfolio of shares in 80 smaller companies.
The £1 billion investment trust has holdings in well-known names such as Stagecoach and Dunelm.
Ed Monk, of Fidelity International, says UK technology firms have strong appeal.
He says: ‘Britain’s reputation in science has made it home to many small technology companies that are global leaders in their field.
‘These don’t get the same attention as their giant American tech cousins, but are often plugged into the same global trends that make them attractive bets.’
He likes Franklin UK Smaller Companies – a fund that holds a selection of British technology pioneers including Vitec, a manufacturer of cutting-edge audio visual equipment and TT Electronics, which makes computer components for products including satellites.
ALLURE: The Government is eager to attract investment into fledgling British businesses to help boost their contribution to the UK economy
Venture capital brings tax breaks
The Government is eager to attract investment into fledgling British businesses to help boost their contribution to the UK economy.
As a carrot they allow big tax breaks to those who invest in Venture Capital Trusts, including an immediate 30 per cent reduction in your income tax bill – so long as you hang on to the shares for five years.
Investors also receive any capital gains tax free – if there are any gains – plus tax-free dividends. The maximum investment is £200,000 in a tax year – though the minimum is usually £2,000 to £10,000.
Managers of venture capital trusts typically use the money to help 20 or 30 young companies grow their businesses.
If all goes to plan, the managers will either sell or float each business and hand over any profit made as a tax-free dividend.
But since the underlying firms are mostly unlisted or trade on London’s junior Aim stock exchange, they are best suited to sophisticated investors. There is no guarantee they will be successful.
Ben Yearsley, director of Shore Financial Planning, says: ‘Venture capital trusts can be attractive for those who want to access a dynamic part of the market that you can’t get elsewhere.’
Costs are steep, including upfront charges of up to 2 per cent and annual charges as high as 4 per cent. Yearsley likes Maven Income & Growth and Pembroke B shares VCTs.
Your pension questions answered
Are you trying to save for retirement, make the most of your income in old age, navigate the state pension maze, or just feel baffled by some bit of pension jargon?
In the This is Money podcast this week, former Pensions Minister and our regular columnist, Steve Webb, is on hand to help you out.
Editor Simon Lambert and host Georgie Frost are also joined by The Pensions Advisory Service boss Michelle Cracknell to answer reader questions.
Property brings solid gains
Physical buildings such as shops, offices, warehouses and factories with their foundations in UK soil could not be more British. Investors usually buy through funds or real estate investment trusts.
Commercial property can provide consistent income and long-term returns – and is an important ingredient in diversifying investments providing some protection from stock market falls.
Although no guarantee of what lies ahead, the average property fund has returned 40 per cent over five years and 65per cent over ten years.
Patrick Connolly, of financial adviser Chase de Vere, says: ‘We’ve seen how effective this can be in recent weeks when commercial property investments have held up while stock markets have fallen.’
But a fund which holds bricks and mortar is not easy to sell quickly – the managers will have to offload the properties to release cash.
This was seen when property funds such as those run by Standard Life and Aviva were suspended from trading in the upheaval after the EU referendum.
Connolly adds: ‘We only recommend funds that invest in physical property as they have far less correlation to the stock market and are less volatile than those that invest in property shares.’
He likes funds that invest widely across the UK and are not too fixated on London – such as M&G Property Portfolio, L&G UK Property and Janus Henderson UK Property.
Peer-to-peer loans beat cash deposits
Britain’s small businesses often turn to peer-to-peer loans as key means to growing their sales.
These let ordinary people stump up their own money for firms to borrow and in return receive interest that aims to beat cash deposits.
The deals are arranged through an online ‘peer-to-peer’ lender – a kind of dating agency for businesses and consumers.
One of the biggest is Funding Circle where investors can earn rates of up to 7 per cent. Using its automated option lets investors spread their risk across many businesses.
For example, lending £2,000 allows investors to spread money across at least 200 businesses – but the interest rate they earn will be lower, perhaps 4 per cent. P2P investments can be held in a tax-free Isa.
Minnow British businesses that lenders have supported via Funding Circle include The Great Yorkshire Gift Shop in Leeds.