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In 1907, The Economist magazine described the City of London as “the greatest shop, the greatest store, the freest market for commodities, gold and securities, the greatest disposer of capital, the greatest disposer of credit, but above and beyond . . . by reason of all these marks of financial and commercial supremacy, the world’s clearing house”.
Some 111 years later, however, reporters at the Financial Times note that shoppers are now avoiding the store, are not in the market for its securities, nor are they predisposed to give it capital or credit and are, by reason of this financial unpopularity . . . clearing off.
In April, a Bank of America Merrill Lynch survey of 176 global portfolio managers responsible for $543bn of client money found that UK equities were deemed the least attractive asset class anywhere in the world. Given the choice of 22 asset classes and regions worldwide — including low-yield or no-yield cash and bonds — they put shares in London-listed companies at the bottom of their shopping list.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, suggested professional investors were beyond perusing back issues of the UK magazine.
“Pessimism about the UK equity market has become entrenched among global fund managers,” he says.
Individual investors are no more nostalgic. In January of this year, data from Britain’s Investment Association showed that UK equity funds experienced monthly net retail outflows of £532m, making London’s market the least popular among private clients and their advisers.
But what of wealth managers and family offices, for whom a 111-year gap is but a few generations — and barely enough time to change a long-term asset allocation?
Even they are conceding that it is hard to ignore the movement of capital out of London’s “freest market”. Wealth manager Rathbones can trace its history back to the 1720s, but its head of asset allocation research, Ed Smith, admits there has been only one story in 2018. “Foreign selling is still a force to be reckoned with,” he says. “And it has been rather indiscriminate.”
Global sentiment is so uniformly anti-British that the 20 per cent of companies doing the least business in the UK have performed no better in the past 18 months than the 20 per cent most exposed to the UK.
And while 1907’s portfolio managers could see UK equities as a proxy for booming trade with the British empire, their successors see them as too exposed to a reduction in trade with the EU.
Britain’s vote to exit the bloc, and subsequent uncertainty over future trading relationships, outweighs other value judgments, suggests Pictet Wealth Management chief investment officer, Cesar Perez Ruiz.
“At first sight, valuations for UK equities look like they are becoming more attractive,” he says. “But in fact, domestically focused FTSE 250 equities are among our less favoured assets because of the economic uncertainties that surround Brexit.”
Rathbones notes that the FTSE 100 share index has underperformed the MSCI World index by more than can be justified by those macro-economic factors it normally shares close links to: the sterling exchange rate, the oil price and Asian economic momentum.
Smith puts the lagging performance down to EU concerns, and the prospect of a left-wing government under Labour leader Jeremy Corbyn. “Clearly either Brexit or Corbyn — or both — has caused fundamental relationships to break down,” he says of the lack of correlation.
However, analysts at research house Redburn suggest past experience should be brought to bear on present day reticence.
“It is important to distinguish between popularity and investment opportunity,” they argue. “It is true that the UK is not popular with retail investors at the moment, hence the fund flows. But it is often the case that assets are most attractive as an investment at a time when that asset class is understandably unpopular.”
GAM investment director Adrian Gosden agrees, and is happy to browse in London’s “greatest shop”. He says, “For the UK, the uncertainty of Brexit offers investors a very foggy shop window, but here lies the opportunity . . . The UK economy is experiencing strong employment and wages are starting to move upwards . . . Interest rates are on the move but in a gradual, ordered and communicated way . . . I believe UK equities, in part due to their unpopularity, actually offer good long-term possibilities.”
While London’s attractions are no longer timeless, they are all about timing. At Hassium Asset Management, chief executive Yogi Dewan acknowledges that a forward price/earnings ratio of 13.5 for FTSE 100 shares makes them cheap relative to Europe and the US. But he still has no UK exposure in his global portfolios. He is waiting: “We would not be buyers today but see value as Brexit uncertainty clears.”
For now, many appear to share the view of another 20th century financier, the late Lloyds Bank chairman Lord Balfour: London is a great place to be, as long as you can get out of it.