Pyrford Says Brexit Is Sideshow, Consumer Debt Bigger Challenge

(Bloomberg) -- Pyrford International Ltd. Chief Executive Officer Tony Cousins says he’s avoiding U.K. banking and retail stocks because the country’s economy is set to weaken as consumer debt piles up.

That’s a bigger problem than Brexit, says Cousins, who is also chief investment officer of Pyrford, the European arm of BMO Global Asset Management.

“The U.K. has a lot of challenges. The one that most people talk about is Brexit, which I think is not insignificant, but it’s a bit of a sideshow,” said Cousins in a phone interview on Wednesday. “The big problem in the U.K. has been the major build up in consumer debt that we’ve seen, particularly whether it’s mortgage debt or car debt or just general consumer debt.”

The BOE warned last month that banks may be slipping into a “spiral of complacency” in consumer lending after years of low defaults and falling unemployment. Booming car-loan growth, extended interest-free periods for credit cards and easing of mortgage standards have created a “pocket of risk” that may weaken the financial system, Bank of England Executive Director Alex Brazier said in a speech.

Lenders have been offering mortgages at low interest rates, which will have a “blunt effect” on homeowners when rates rise, said Cousins, who is based in London. There aren’t any U.K. banks or retailers in the BMO Pyrford International Stock Fund which he co-manages. The U.K.-listed companies in the portfolio either generate their earnings overseas or are defensive companies, Cousins said. BMO Global Asset Management has $237 billion of assets under management.

The debt problem may be catching up to consumers, with recent falling property prices a bad signal for retail sales, according to Cousins. House prices in England and Wales slipped last month, in the most lackluster July in five years, according to Acadata and LSL Property Services Plc. House prices had held up partly due to a government program that encouraged first-time buyers to enter the market, according to Cousins.

“When house prices are very strong, retail spending is very strong,” Cousins said. “House prices have turned soft again, they actually fell in London last month, and this is putting immense pressure on retail sales.”

Stock ideas

Amid a bleak macro-economic outlook, Cousins is telling investors to stay defensive. While international stocks are cheaper than U.S. stocks, they’re still expensive compared to their own history, he said.

“There are always problems in the world and you don’t need to wait for things to be solved,” Cousins said. “You just need to wait for things to be cheap before you can become more bullish.”

• Pyrford recently started buying shares in inspection and testing companies Bureau Veritas SA in France and SGS SA in Switzerland.
• “These stocks became cheap because of fears of protectionism generated by Donald Trump,” Cousins said. “We do believe that world trade will continue to grow.”
• Cousins also suggests looking at “knowledge-based” companies that occupy leading positions in industries, such as health care, engineering, services and in niches such as elevators.
• “There are some fantastic companies you can find in Europe,” Cousins said.

To contact the reporter on this story: Lisa Pham in London at lpham14@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Brian Lysaght