‘I cannot think of a single reason to be long this market’. Those words were uttered to us recently in relation to the UK equity market by one of our longer standing, highly experienced stockbroker contacts and it encapsulates current sentiment perfectly.
We haven’t yet asked for the updated version following the latest UK political shenanigans although we strongly suspect it would not be printable.
There is a lot of talk in investing circles about pessimism creating the best opportunities or as Warren Buffett would say, ‘be greedy when others are fearful’.
Whilst this is undoubtedly true with the marvellous benefit of hindsight, all too often when the pessimism is in full flow, experienced fund managers and the general investing population alike are too concerned with the litany of imminent wealth destroying dangers to actually act on what we all know to be sage advice.
For sure, the list of these current dangers is extensive and includes high and sticky inflation, rapidly rising interest rates, a cost-of-living crisis, potential winter energy shortages, the ongoing war in Ukraine, political instability in the UK, draconian Covid restrictions in China, an imminent collapse in corporate profitability and a whole host more besides.
We will not debate these dangers further now as they are well known and have been widely discussed already – we are where we are after all. Instead, we offer a few statistics to remind readers just how far sentiment and markets have fallen.
A typical 60:40 portfolio (60% equities, 40% bonds) is currently on track for its worst performance in 120 years according to analysis from Bank of America, which projects returns breaching -20%. No wonder investor nerves are frazzled.
Meanwhile, investor sentiment surveys have been universally maximum bearish for most of this year, a period longer than I can recall in my career. A recent study from BCA Research, which is new to me, incorporates actual trading data and paints similarly a bleak picture of sentiment towards US equities, placing it at lows not seen since the global financial crisis of 2007/2009.
While perhaps not a total surprise given recent events, the scale of outflows from UK equities this year is quite something. Year-to-date, these have totalled a staggering $18bn according to Bank of America’s Global Investment Strategy EPFR note, eclipsing 2016, the year of the Brexit vote, by a significant margin. Wishful thinking possibly, but are we at or close to ‘peak’ bearishness on the UK?
Further on that point, the following chart highlights the performance of the more domestically orientated Mid 250 index relative to the wider UK equity market over the past 20 years.
Whilst steady outperformance is the norm, the relative underperformance of the past 12 months or so has already comfortably surpassed the experience of the financial crisis in 2007/09.
Source: Tyndall
Valuations in the UK certainly appear increasingly attractive. The 12-month forward price-to-earnings (P/E) ratio of 9x is approaching the depths of 2008/09 whilst relative to other major geographies it is nearing all-time lows.
A startling illustration of the extent to which valuations have fallen is the fact that iPhone maker Apple currently has a higher market value than the entire UK FTSE 100 combined.
It is at times like these that investors should look to the longer term, without being constrained unduly by worries over near term volatility. Consequently, as uncomfortable as it might be, the current market backdrop creates an opportunity to commit capital to strong business franchises at incredibly attractive prices.
We gave up a long time ago trying to predict what would happen to markets and share prices on a very short-term view and so, whilst mindful that there may well be further bouts of volatility and/or near-term weakness, we find the combination of significant market weakness, near universal bearishness, particularly towards UK equities, compelling valuations and outstanding individual stock opportunities simply too good to ignore. We are, unashamedly, being greedy today as others are demonstrably fearful.
Simon Murphy manager of the VT Tyndall Real Income fund. The views expressed above should not be taken as investment advice.