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False hope on UK assets

July 2018

While international fund managers seemed to give the UK market a tentative thumbs up, it is not a ringing endorsement. 

  • Fund managers have been increasing allocations to UK stocks after a period when they were at their most negative
  • Every other sentiment survey shows investors resolutely negative on UK assets
  • The only reason that international investors appear to be increasing their allocation towards UK equities is that they have grown disillusioned by what is on offer elsewhere

The UK stock market has been so unloved for so long that any sign of a reversal is sentiment might be a cause for a (small) celebration. This apparent revival came from the most recent Merrill Lynch Bank of America Global Fund Manager Survey, which found that fund managers were increasing allocations to UK stocks after a period when they were at their most negative. 

Could this be an endorsement of the new Brexit agreement? A sign that UK assets had become too cheap? Or even that investors have finally recognised that the UK market is internationally diversified and therefore the whole Brexit/no Brexit thing is a bit of a red herring. 

No, we don’t believe it either. The FTSE 100 may be internationally diversified and its revenue streams are, for the most part, not geared to the fortunes of the UK economy. Unfortunately, this international diversification means that its fortunes are geared to the ebb and flow of the currency, which in turn is influenced by Brexit. UK stocks can’t escape. 

At the same time, every other sentiment survey shows investors resolutely negative on UK assets. UK equities and UK property posted the largest drop in sentiment between June and July, according to the Lloyds Bank Investor Sentiment index. The root cause, once again, was uncertainty over Brexit. The Prime Minister’s Chequers agreement has prompted resignations of senior cabinet ministers and been met with a resounding ‘Nein’ or ‘Non’ from EU counterparts. Investors aren’t impressed.

In fact, the only reason that international investors appear to be increasing their allocation towards UK equities is that they have grown disillusioned by what is on offer elsewhere. Allocations to eurozone and emerging market equities have fallen heavily as political and trade tensions have taken their toll on sentiment. The potential ramifications of a global trade war appear to trump the domestic squabbles over Brexit for many internationally-focused investors. 

Investors are always earnings-sensitive and expectations of profits have fallen. Allocations to equities overall have fallen. The BofA ML survey found that a trade war was named by 60% of respondents as the biggest tail risk to markets, the highest level of concern over any tail risk in the BofA survey since the days of the EU sovereign debt crisis in 2012. These considerations appear to weigh more heavily on fund manager thinking. 

It seems that where sentiment is improving towards the UK it is not because investors believe that the UK is about to seize the opportunities of Brexit, but simply because the troubles elsewhere look a little bigger.

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