The UK economy continues to defy the Brexit pessimists, with growth in the fourth quarter of 2017 beating expectations after a continual improvement throughout the year. Kyle Williams, Fund Manager on the JPM UK Equity Growth Fund, explains how this serves as a neat reminder to us of the importance of expectations in investment decision making.
In the immediate aftermath of the EU referendum, many UK economists were predicting a recession the following year and analysts slashed their estimates for companies across a wide range of sectors where earnings looked most vulnerable to a Brexit-related downturn.
One of the most extreme examples was the UK housebuilders, where forecasts for both price and volume growth were cut significantly, with the 2008/9 downturn clearly in the minds of many. However, the sector went on to materially outperform the FTSE All-Share during a recession-free 2017, exceeding those heavily downgraded expectations as the market for new build housing holding up well over the course of the year.
By contrast, expectations remained high for some companies in traditional growth sectors, seemingly immune to any negative impact from the UK’s leave vote. Pharmaceuticals were a perfect example of this, with analysts failing to take into account ongoing pricing pressure in the US and disappointing pipelines. As a result, the sector was one of the worst performers in 2017.
The overconfidence effect
As behavioural finance investors, expectations are particularly important to us. Time and time again, we observe that the market is overly optimistic about growth companies and overly pessimistic about value companies. This is known as the “overconfidence effect”, which is widely documented in psychological research.
The overconfidence effect can contribute to both an overpricing of traditional growth companies, and an under-reaction to new information that conflicts with the prevailing judgement. Biases such as these are persistent and provide us with investment opportunities.
Identifying genuine growth
Our stock selection approach for the JPM UK Equity Growth Fund is entirely bottom-up and can result in differentiated sector allocations compared to traditional growth strategies.
We look for high quality companies that are consistently exceeding expectations. In doing so we are able to access pockets of genuine growth in the UK market, regardless of the prevailing economic environment. This disciplined approach means that we have held an overweight position in the household goods and home construction sector and an underweight position in the pharmaceutical sector over the course of the past year.
Kyle Williams is Portfolio Manager for JPM UK Equity Growth Fund. Read more >
Investment Objective: To provide long-term capital growth through investment primarily in a growth style biased portfolio of UK companies.
Key risks: The value of equity and equity-linked securities may fluctuate in response to the performance of individual companies and general market conditions. The single market in which the Fund primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Fund may be more volatile than more broadly diversified funds.