The UK stock market is the most unpopular asset class in the world among big international investors, with confidence languishing at its lowest levels since the financial crisis.
BlackRock, State Street, Deutsche Asset Management and Lyxor are running underweight positions in UK equities in global or European portfolios due to worries about Brexit and the weak outlook for corporate earnings.
“Pessimism about the UK equity market has become entrenched among global fund managers,” said Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist. “The US, eurozone and even Japan offer more compelling opportunities.”
A BofA survey of 163 managers who run global investment portfolios and oversee $510bn in assets found that UK equities are viewed as the least attractive choice (the biggest “short” — a bet that prices will fall).
Out of 22 broad asset classes and regions worldwide — including banks, cash, technology stocks, bonds, and US, Japanese and emerging market equities — the UK stock market was judged the least popular.
The blue-chip FTSE 100 index hit an all-time high in mid-January but has dropped 9 per cent since then. Its subsequent retreat has confirmed it as one of the world’s weakest performers since the country voted in June 2016 to leave the EU.
Since then, the UK equity market has delivered a total return, including dividends, of 14.6 per cent in dollar terms, compared with 34 per cent for Germany and 36.4 per cent for the US stock market.
The last time the UK was seen as the “basket case of the world” was in the lead-up to the pound’s eviction from the European exchange rate mechanism in 1992, according to Neil Woodford, one of the UK’s best known fund managers.
“There’s a consensual view that the UK economy is challenged by inflation, a lack of real wage growth and of course Brexit issues and political uncertainty,” he said. “When you go below the surface . . . I see an economy with more people in work, with more wage growth, less inflation, a bit more investment spending, continued recovery in manufacturing and exports, and I see an economy growing by 2 per cent rather than the recession that some people are forecasting.”
Almost half (46 per cent) of the managers surveyed by BofA were “underweight” UK equities — that is, holding less than the benchmark portfolio used by the manager — while only one in 10 funds were “overweight”.
Many put their concerns down to fears companies may delay investment projects due to the uncertainties around Brexit.
“The UK is the weakest economy in Europe and it is likely to deliver the weakest corporate earnings growth in 2018 of all the main stock markets worldwide,” said Britta Weidenbach, head of European equities at Deutsche Asset Management.
But JPMorgan Asset Management has built an overweight position in UK equities across many of its global portfolios following the Brexit vote.
“The uncertainties in domestic UK politics and the challenges facing the economy are well known and already reflected in equity prices,” said Paul Quinsee, global head of equities at JPMAM. “We can still find lots of very attractively valued stocks with nice dividend yields backed by good free cash flows.”
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