Why you should care
Because maybe there are some good buys in undervalued British equities.
BlackRock, State Street, Deutsche Asset Management and Lyxor are running underweight positions in U.K. equities in global or European portfolios due to worries about Brexit and the weak outlook for corporate earnings.
“Pessimism about the U.K. equity market has become entrenched among global fund managers,” says Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist. “The U.S., eurozone and even Japan offer more compelling opportunities.”
The U.K. 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.
A Bank of America survey of 163 managers who run global investment portfolios and oversee $510 billion in assets found that U.K. 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 U.S., Japanese and emerging market equities — the U.K. 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 percent 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 U.K. equity market has delivered a total return, including dividends, of 14.6 percent in dollar terms, compared with 34 percent for Germany and 36.4 percent for the U.S. stock market.
The last time the U.K. 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 U.K.’s best-known fund managers.
“There’s a consensual view that the U.K. economy is challenged by inflation, a lack of real wage growth and, of course, Brexit issues and political uncertainty,” Woodford says. “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 percent rather than the recession that some people are forecasting.”
Almost half (46 percent) of the managers surveyed by Bank of America were “underweight” in U.K. equities — that is, holding less than the benchmark portfolio used by the manager — while only 1 in 10 funds were “overweight.”
Many put their concerns down to fears companies may delay investment projects due to the uncertainties around Brexit.
“The U.K. 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,” says Britta Weidenbach, head of European equities at Deutsche Asset Management.
But JPMorgan Asset Management has built an overweight position in U.K. equities across many of its global portfolios following the Brexit vote.
“The uncertainties in domestic U.K. politics and the challenges facing the economy are well-known and already reflected in equity prices,” says 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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