The Brexit debacle has seen global investors shun UK assets. This is understandable: why take the risk on an economy and market in flux when there is the rest of the world to choose from?
- There was no reason for the UK market to underperform in the wake of the referendum. And yet it did.
- Investors still believe that a company’s fortunes are tied to the economy of where it lists.
- Grouping by geographic listing increasingly looks like an odd way to run money
However, as many were quick to point out in the wake of the Referendum, the UK stock market is not the same as the UK economy. Most of the revenues from the UK’s largest companies are drawn from abroad, so there was really no reason for the UK market to underperform. And yet it did.
Like it or not, people still believe that a company’s fortunes are tied to the economy of where it lists. European companies have struggled this year because the European economy is weak, despite the fact that – as with UK-listed companies – many have operations all over the world.
Why does this legacy view remain? Partly it is because many cling to asset allocation models that have specific weightings in the UK, Europe, US, emerging markets and so on. This seems an anachronism in modern, globalised financial markets and yet it persists as a model. Some institutional groups have moved to a more global or thematic approach, but while the old model lingers, it can still see certain markets neglected because of domestic difficulties.
Some may argue that domestic UK investors need higher weightings in UK markets because that’s where their liabilities lie and ‘home bias’ has long been a function of portfolio construction. However, here too the risk is that investors aren’t really exposed to their domestic market, but instead to a bunch of global companies. They are taking an unwitting risk on currency anyway.
It is difficult to propose a shake-up of groupings that have persisted for so long. Asking fund management groups, asset allocators and financial advisers to dismantle a structure that they have used for decades is likely to receive short-shrift. However, this does look like an increasingly odd way to run money, particularly when for many investors time scales are so long and the world may look very different.