UK investors have become increasingly negative on gold over the past year but remain most confident on investments in domestic markets, a survey carried out by Lloyds Bank shows.
The Lloyds Bank Private Banking Investor Sentiment Index, which canvassed the opinions of more than 4,500 UK adults at the start of August, founded that sentiment towards the yellow metal declined significantly over the past 12 months.
In August 2014, gold was the third strongest asset class with 24.08 per cent more investors taking a positive rather than negative stance on it. However, this has fallen to just 11.40 per cent in this month’s survey – marking the largest fall in sentiment towards the asset in two years.
Gold would normally be expected to do well in the more volatile conditions that have stalked the market over the past year or so, as concerns such as geo-political tensions in the Middle East, the spread of Ebola, the timing of interest rate rises in the US and the UK and the high valuations in both equities and bonds made investors nervous.
However, as the graph below shows, gold has performed much worse than global stocks and bonds (represented by the MSCI World and Barclays Global Aggregate indices respectively) over the past 12 months. The metal is down close to 10 per cent.
Performance of indices over 1yr
Source: FE Analytics
Ashish Misra, head of portfolio specialists at Lloyds Bank Private Banking, said: “While we would expect to see gold do well in times of volatility, investors have generally held their nerve and reached out to other asset classes for returns. In addition, with the price of gold falling to a five-year low last month, the potential long-term outlook for gold is modest.”
Arguably the main factor that has been holding back gold over recent months is the likelihood that the Federal Reserve will soon announce its first interest rate hike, as the metal tends to perform poorly in a rising rate environment.
But not all analysts expect this to mark the start of renewed weak spell for gold, with some even tipping the metal to end the year higher than its current $1,117 a troy ounce. Capital Economics, for example, sees the asset as ending 2015 at £1,200, after the Fed makes its move.
Commodities economist Simona Gambarini says the macroeconomic forecasting consultancy is positive on gold over the medium term, especially if Greece is ultimately forced to leave the eurozone or the US rate increase leads to a marked ramp-up in equity and bond volatility.
“We think that sentiment towards gold is now excessively negative. Nonetheless, given the difficulty in valuing an asset that pays no income and the importance of safe-haven demand, which is also largely subjective, the current market mood cannot be ignored,” she said.
“Admittedly, it is hard to be bullish on the prices of gold and silver until markets have time to digest the first Fed rate hike. However, it would be wrong to conclude that the medium-term outlook for gold depends solely on the evolution of US monetary policy, and that Fed tightening can only mean lower prices. And while sentiment is currently negative, this at least means that investor holdings of gold are relatively low.”
Lloyds Bank Private Banking Investor Sentiment Index August 2015
Source: Lloyds Bank
The above table shows that investors remain most confident about assets based on home shares, with the four sterling-denominated asset classes topping the table.
UK property is the area that investors are most positive on, which is backed up by the latest fund flow data from the Investment Association. The IA Property sector has been a persistent favourite over the past year or so and took £225m in net retail inflows in June alone.
Our data shows that Henderson UK Property has been the most popular open-ended property fund over the last year, taking in around £1.5bn in fresh money. It’s followed by M&G Property Portfolio, L&G UK Property and Standard Life Investments UK Property.
Whitechurch Securities is one investor with a positive view on the asset class, but it cautions that the strong inflows into the space need to be closely watched.
“We continue to like the asset class as a bond proxy, an income generator and for its lack of correlation with equities and bonds. We realise we are not alone in this thinking and property funds have witnessed some of the biggest inflows over the last year as investors diverted ‘bond money’ to the asset class,” the firm said in its latest update.
“However, no property manager has sounded any cautionary note about the market overheating… yet. But it is something we need to keep monitoring. Whilst the low volatility and steady returns from commercial property are compelling, it is liquidity risk that needs to be monitored.”
Eurozone equities, on the other hand, fare the worst when it comes to investor sentiment, with 43.88 per cent more investors being negative rather than positive on this part of the market.
While European stocks and the funds that invest in them have outperformed the FTSE All Share over the past year, the Greek debt crisis and the anaemic economic recovery have held back sentiment.
Performance of indices over 1yr
Source: FE Analytics
While the MSCI Europe ex UK index is up 7.35 per cent over one year, it has fallen 7.69 per cent since mid-April after Greece came perilously close to defaulting on its debts and dropping out of the single currency.
Although the country’s bailout deal has been secured, there are some lingering concerns about the long-term situation and many expect Europe to remain highly volatile. However, there are signs that investors have started to return to European stocks in recent weeks.
Data from BlackRock shows inflows into European equity trackers amounted to $4.8bn in July and reached a new year-to-date record of $25.3bn.
Ursula Marchioni, head of exchange traded product research at BlackRock, said: “After a strong start of the year – mainly on the back of the ECB embarking on a QE programme – the theme went out of favour in April and May, due to the risks related to Greece uncertainty, particularly the political contagion.”
“The renewed interest in June and July signals in our view a ‘buy-on-dip’ approach taken by European investors towards their domestic equity market. Given the strong second quarter earnings season and the double-digit earnings growth matched by strong top-line growth from European companies, we expect this theme to continue into the coming months.”
