With the FTSE100 dipping below 7,000 for the first time in over a year, and with professional investor sentiment fairly negative about UK equities at the moment, what does the future hold for those investing in the UK?
The latest Bank of America Merrill Lynch fund manager survey shows pessimism towards UK equities reached an all-time high in March. Morningstar Direct data also shows more than £6 billion has been pulled from UK funds in the year to 28 February. Another recent poll showed that UK stocks were the least popular asset class among global fund managers.
Much of this negative sentiment has been caused by Brexit, which has left many international investors nervous about investing in UK companies. However, there is a good case for believing that this negativity is overdone, not least because the impact of Brexit is mostly priced into the UK market already. With valuations of UK stocks currently at very low levels, contrarian investors now believe there are investment opportunities in the UK market.
The reality is, whilst the economy is not booming, the UK does not appear to be heading for recession. Indeed, the Chancellor was ‘positively Tiggerish’ in his Spring Statement. Philip Hammond spoke of a “turning point” for the UK, and put forward an upwards revision in GDP growth, a downward revision in the budget deficit and wage growth potentially outpacing inflation within a year. UK employment also remains strong
Clearly there are challenges for the economy, with a fragile retail sector and Brexit negotiations still being worked through. But while UK GDP growth is now running behind some of our trading partners, global growth continues to support the UK economy.
It should be remembered that the UK recently had strong growth while other economies were faltering. For example, the UK grew by 2.1% in 2013 and 3.1% in 2014, while the eurozone saw growth of 0.2% and 1.6%. Weaker growth now merely reflects a number of different factors coming to a head.
It should also be remembered that the UK remains one of the world’s largest economies – it was the fifth largest economy in 2016 – and consistently ranks highly in the World Bank’s ‘Ease of Doing Business’ rankings. These are based on 10 regulatory or practical matters that are widely considered important to establishing and running a business. So the UK is still very much open for business.
As investors worldwide tend to have a home bias when it comes to their investment portfolios, it matters to UK investors that the UK markets perform well. For the reasons cited above, there would seem to be no need to be unduly negative about UK prospects. However, with the global economy enjoying growth across the board, there are plenty of investment opportunities and markets for investors to choose from.
A diversified portfolio makes sense at any time anyway, particularly in volatile times. As we have seen in the last day or so, despite bright prospects long-term for the global economy, Trump’s tariff moves have hit the US and Asian markets hard and shares have dipped strongly.
So there is a case for arguing that the negativity of professional investors towards UK stocks is not entirely justified. Interestingly, a survey on Twitter, quoted in the Spectator, showed that the views of private investors differed, with 54% believing it a great time to invest in UK equities.
To discuss the points raised above and how they could impact on your portfolio, contact Kellands.