Investor sentiment towards UK equities has hit a record low, according to the latest Global Fund Manager Survey by Bank of America Merrill Lynch.
The monthly survey of 176 fund managers, with a combined $514 billion assets under management, showed that pessimism towards the UK market hit an all-time high
A total of 42 per cent of the managers surveyed reported that they were underweight the region.
Unsurprisingly, the continued economic weakness of the UK is the most likely source of this pessimism, principally as a result of continued uncertainty surrounding the UK’s exit from the EU.
Earlier this month chancellor Phillip Hammond claimed to feel ‘Tiggerish’ about the health of the UK economy. His comments were made shortly after the Office for Budget Responsibility revised up its growth forecast for the year from 1.4 to 1.5 per cent.
Investors, though, are more pessimistic, evidenced by the fact that for several months now UK funds have seen more money withdrawn than invested. According to Ben Yearsley, director of Shore Financial Planning, investors seem to be adopting a wait and see approach as the Brexit negotiations rumble on. 'Brexit uncertainty is clearly having an effect on where global managers are allocating,’, he adds. Jason Hollands, managing director of Tilney Bestinvest, agrees the current cautious stance towards UK equities is largely down to political uncertainties.
However, are such concerns justified? Yearsley and Hollands are in the camp that the negativity is unjustified, both pointing out the economy and companies that operate within it are in reasonable shape. Moreover, both commentators argue the economy has been a lot more resilient than gloomy forecasts since the Brexit vote suggested.
Other plus points include the fact that unemployment remains at historic lows. In addition growth, while slow, is not absent. Thirdly, wage growth is at its fastest rate in two years.
Inflation remains a headwind, but is starting to retreat, with figures released earlier this week showing the consumer prices index had fallen from 3 per cent to 2.7 per cent in February.
Adrian Lowcock, investment director at Architas, the fund manager, however, makes the point that even if the UK economy is on a firmer footing than thought, Brexit still presents a potential raft of unknown unknowns. This, he says, is behind the current pessimism towards UK equities.
‘I don’t think that fund managers are necessarily negative on Brexit,’ he says. Rather, ‘it is a risk that is hard to quantify and there is little visibility beyond it at present, so fund managers ask themselves do I need to take that risk and at present the answer is no.’
He adds: ‘Global fund managers have plenty of alternative markets than the UK in which to invest in, where valuations were not as high such as Europe and Japan and don’t have the same risks as the UK.’
For some fund managers, however, now is a good time to buy.
For instance, both Neil Woodford, manager of various UK-focused funds, and Mark Barnett, who manages several UK equity portfolios for Invesco Perpetual, have argued that UK domestic shares are the cheapest they have been in several years.
In a recent interview with Money Observer, Woodford made the case for a more positive outlook on the UK economy, claiming that the British economy is not the basket case that many investors currently see it as.
Likewise, also in an interview with Money Observer, Barnett said that the current ‘depressed valuations’ of UK equities right now makes him a ‘happy buyer.’ ‘The market believes the UK economy is going to run out of steam, he noted. ‘I think these fears are misplaced and that the underlying UK economy is in better condition than the market believes.’
Right now, says Hollands, UK equities could be a 'leading to opportunities for contrarians, with UK equity valuations looking relatively attractive compared to most other developed markets and to longer term trend.’ He adds that UK shares ‘could well turn out to be the wild card performer if the clouds of concern continue to dissipate in the months ahead.'
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