The Bank of America Merrill Lynch (BoAML) global fund survey revealed that portfolio allocation to UK equities was at a historical low last month, making it one of the most unloved asset classes.
Likewise, the latest IA data found UK equity income was the worst-selling sector in February as investors were put off by Brexit and other political uncertainty.
However, over the week ending 13 April $521m entered ETFs with UK equities exposure, more than the total flows of the last six months put together, according to SDPR whole of market data.
Head of SPDR ETFs in the UK Claire Perryman said: “After a long stretch in the investment wilderness, investor sentiment towards the UK market turned a sudden corner.”
Morningstar data revealed that since Brexit, passive UK equity funds still registered inflows in 14 out of the 22 months. Index funds investing in UK equities also saw net flows of £1.08bn, year to date.
While these are estimated fund flows to the end of March, James Illsley, who runs the JPM UK Equity Core fund, says: “With index funds investing in UK equities seeing inflows it’s an encouraging early sign that investors are re-considering their attitudes towards UK equities.
“Should the inflows persist this could potentially be a catalyst to drive the market upwards.”
Hortense Bioy, Morningstar’s director of passive strategies, Europe, adds that this “clearly shows how popular passive funds continue to be, even in a challenging macroenvironment”.
While passive inflows are positive, the Morningstar data also revealed that active funds have seen uninterrupted outflows in each of the last 22 months since Brexit.
Contrarian view vs well diversified
Despite active investors pulling out of UK equities since the Brexit vote, Chris White, head of UK equities and manager of the Premier Monthly Income fund, argues that this is an opportunity for investors who are prepared to take a contrarian view.
He says since the credit crunch, “we have been living in a low growth, low inflation, low interest rate, low bond yield, low volatility world as economies recovered”.
But, things have moved on, he adds. Taking a positive outlook on the UK, he says that the stock market is “polarised rather than expensive” as many areas of the market remain highly valued while others remain cheap.
White adds: “The UK is performing better than many predicted after the EU referendum, albeit slower than our European peers, which should not be surprising given the uncertainty in business about our future trading arrangements with Europe.
“This is an opportunity for investors who are prepared to take a contrarian view.”
However, 7IM’s senior investment manager Peter Sleep thinks otherwise. He explains that international fund managers decided to “take a pass” on the UK and invest in markets elsewhere and argues that view was “more or less correct”.
Comparing the performance of international managers such as Lindsell Train with UK equity investors like Neil Woodford, he explains that managers are only looking at the UK in order to diversify.
Sleep agrees that the “UK looks cheap” and that 7IM has been “topping up” UK equity positions gradually over the last six to nine months as a result.
“However, this will only unfold only slowly and we could be in for a bumpy ride as there could be some noise or unexpected items in the UK economy’s data,” he adds.
“The UK will also not be insulated if there is a correction in the US equity market or if one of the world’s leaders does something disruptive.
“We are hoping for the best for the UK, because we all live here, but we are staying well diversified and we are prepared for a less good outcome.”
Spanner in the works
Thomas Miller’s head of private client investment Andrew Herberts argues that there’s no escaping the uncertainty over Brexit will continue weigh on the economy.
He says: “The worst outcome would be a continuation of this uncertainty and I am afraid that much of our political discourse at the moment seems designed only to prolong it.
“I think that a number of politicians are being irresponsible and are an impediment to a successful conclusion to negotiations – their attitude and actions are making their prediction of a sub-optimal result into a self-fulfilling prophecy.”
That said, Herbert adds: “The UK is probably a pretty good place to be largely on the basis that the negative sentiment surrounding the economy is baked in.
“While UK growth is not going to suddenly leapfrog to the top of the world rankings, it is probably going to be better than the downbeat consensus currently assumes – that disconnect may well cause the market to rally ahead of other regions.”
