Due to global macro uncertainty, we remain somewhat concerned about the UK. The fundamental background for UK equities is certainly challenging, but most of the negative events have already been priced in. For that reason we believe that any potential positive macro developments should not be ignored by investors. We will continue to monitor key economic data, such as the labour market, monetary and fiscal policies and obviously the conclusion of the Brexit saga, which could dictate the trajectory of equities for the remainder of 2019.
Business activity moved into negative territory for the first time since the EU referendum, and part of the decline in activity was due to a lack of new work to replace completed projects. Reduced spending by euro-area clients led to some companies to attempt to mitigate Brexit uncertainty by focusing on non-EU export markets. On the positive side, the employment index has recovered in the services and manufacturing sectors following two consecutive months of contraction.
We recently had a chance to meet with several UK companies. While many seemed cautious about the short-term outlook, the tone of management was not that negative, if we exclude political uncertainty. Although Brexit brings weak short-term visibility and depressed capital expenditure deployment in the region, it also forces companies to be increasingly vigilant about where they allocate their capital. Some have chosen to focus their efforts on overseas markets. Most companies have already established their contingency plans to mitigate the effects of both a hard and soft Brexit.
Here are our observations regarding some of our UK holdings:
The outlook for the UK remains challenging, but we believe that equity prices are already reflecting all of the recent negativity. Even if the Brexit situation has put the region under pressure, we are still seeing some interesting investment opportunities in the country.
The Global Alpha Team
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