Investors have been losing faith in the UK markets in recent months, with two-thirds of UK funds suffering outflows in April at a total loss of £836m, according to data from Calastone.
This was the largest volume of redemptions on record as UK inflation reached a 30-year high and GDP began to decline, opening up the potential for recession.
As things stand, James Harries, fund manager at Troy Asset Management anticipates a “significant risk” of a recession within the next 12-18 months.
With this negative cloud looming above the market and investors getting cold feet over their UK holdings, Trustnet asks experts whether now is the right time to sell out of UK equities.
Total return of FTSE All Share vs MSCI World over the past year
Source: FE Analytics
Simon Skinner, head the European investment team at Orbis, said that the UK has been out of favour for many years due to the dominance of “dinosaur” sectors like energy and materials that are viewed as being ‘old economy’ assets.
This may be the case, but Michael Crawford, fund manager of the Chawton Global Equity Income fund, said that the well-established nature of these companies could be appealing to investors, especially compared with nascent US technology stocks that were established over the past 20 years.
However, the UK risks staying too stuck in the past, according to Crawford. While some countries have focused on developing fast-growing industries such as semiconductor production in Korea and Taiwan, the UK government has opted to preserve traditional sectors such as autos and steel, which are more competitive and open to distruption.
Some may say that this failure to develop was a missed opportunity, especially considering the crucial role played by semiconductors in the global supply chain.
Crawford added that although the big ‘old school’ players such as Shell and BP are benefitting from high oil prices recently, the transition away from fossil fuels and prevalence of renewables could damage performance long-term.
He said: “Investors can see that the near-term prospects of the UK companies have improved but also remains aware that these are driven by cyclical factors such as the oil price and interest rates which most likely will not sustain.”
Will Argent, manager of the Gravis Clean Energy Income fund, agreed, saying that renewable sources of power will outperform the big FTSE 100 oil giants that the market is reliant on now.
Even though UK equity funds are clearly in “choppy waters”, Nick Kirrage, co-head of the Global Value Team at Schroders said that many have demonstrated durability through a very difficult period.
By readjusting to meet new challenges brought about by Covid, many UK equity funds have left the pandemic structurally stronger.
Kirrage said: “Many of the stocks that we own have taken advantage of the past two years to fundamentally put their houses in order. They have shown an extraordinary ability to pivot to meet huge challenges when they occur.”
The unfavourable view many investors have on the UK market is “unfair”, according to Louise Kernohan, portfolio manager of the BNY Mellon UK Equity and Sustainable UK Opportunities funds.
A positive from this, she added, is that the lack of sentiment has led to compelling valuations for investors looking to buy UK equities at a cheap price.
However, Crawford said that the “lack of a strong venture capital sector” means buyers could find better opportunities abroad.
He said that those companies “that do break through tend to be acquired by larger global competitors relatively early in their lifecycle”, such as the microchip producer, ARM, which looked promising but was sold to a holding company in Japan that offered faster development. It also means that competitors in the US are more likely to succeed over UK rivals.
Likewise, the UK’s small market size also puts it at a disadvantage against the US and other larger countries, with UK companies limited by domestic growth.
For example, the US DIY chain, House Depot, has a market capitalisation of around $300bn (£246m) whereas the UK equivalent, Kingfisher (which owns shops like B&Q), is at £5bn.