BLOG: The three risks faced by UK investors in 2016

Written by: Richard Buxton
There are three key risks facing investors in UK equities in 2016: Brexit, rate rises, and manufacturing weakness, but each cloud has a silver lining, and each risk comes with opportunities.

A serious risk facing investors in UK equities is Brexit, the potential departure of the UK from the European Union. Worries about this eventuality, and about the future of the UK outside the EU, could put off or delay international investors from allocating to the UK.

Nevertheless, I simply do not believe Brexit will happen. The British people are too conservative – with a small ‘c’ – to countenance the upheaval such a change would bring. And David Cameron will likely obtain sufficient concessions from Angela Merkel to satisfy the British electorate.

My view is that Germany will grant these concessions because she wants an EU that includes the UK. Worries about Brexit could weaken sterling, but a weaker pound is helpful not only to UK exporters but to large companies with earnings from overseas, such as pharmaceuticals.

A second risk is higher interest rates, which would increase borrowing costs for companies and consumers. These are likely to follow in the UK having been introduced in the US by the US Federal Reserve in December.

My view is that the Bank of England will be unlikely to want to wait more than a couple of quarters before raising rates. If the Bank of England were to wait longer, and the Fed hiked again in the interim, there would be a danger that it would fall behind.

Higher rates are a risk, but one that also comes with opportunities. Banks, such as Barclays, Lloyds Banking Group and HSBC, all of which I hold in the top 10 of the Old Mutual UK Alpha fund, should benefit from rising interest rates.

The third risk is manufacturing weakness. This is proving a real concern, not just in the UK but worldwide. Many manufacturing indicators have deteriorated. Manufacturing companies, especially those serving energy- and mining-related sectors, could cut jobs, and if they do so in sufficient numbers this could even reverse the terrific improvement in the labour market in the US.

But even this risk has a silver lining. Consumers are benefiting from the windfall of lower oil prices, which has put more money in their pockets. It is not yet a given that the weakness in manufacturing, exacerbated by an inventory cycle, will drag services and consumption into recession.

Investor sentiment has started the year extremely nervously, focusing on the very real risks. In the Old Mutual UK Alpha fund I am taking advantage of the opportunities which those risks offer.

Richard Buxton is manager of the Old Mutual UK Alpha fund at Old Mutual Global Investors

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