The impact of the UK’s referendum on EU membership continues to be felt three years after the result showed a slim victory for the ‘leave’ campaign.
The result has caused much uncertainty over the UK’s future relationship with the EU, its largest trading partner, and posed questions over future economic growth.
This has been reflected in the performance of the UK market in comparison with its peers, as the FTSE All Share has made a total return of 33.24 per cent compared with a gain 67.42 per cent for the MSCI World ex UK index.
As such international investors have become much more cautious about committing to the UK market.
Indeed, UK equities have been the consensus underweight among respondents to the Bank of America Merrill Lynch Global Fund Manager Survey since the vote.
Meanwhile, UK investors have pulled around £11.3bn from domestic equity funds, according to data from the Investment Association (IA).
Source: Investment Association
There was a glimmer of hope in May, however, as the most recently available IA data showed. UK equities funds recorded a net inflow of £532m, only the fifth month of positive sales since June 2016, as the chart above shows.
It remains too early to tell whether these inflows mean that UK equities have become so cheap – as some fund managers contend – that they can no longer be ignored.
As such, FE Trustnet spoke with several industry experts to find out what it will take for investors to return to the UK market.
Currently, the UK is as unloved a stock market as you can get, said Adrian Lowcock, head of personal investing at Willis Owen.
“The UK market is currently cheap, and there are huge discounts on some stocks, particularly those that are focused on the UK domestic economy or those that are more income-oriented, as growth is the major global trend at the moment,” he said.
Lowcock lamented the lack of a clear outlook in the Brexit saga, which he said could lead to a ‘no deal’ or general election, “which just throws up more uncertainty”.
The only viable option is to take a long-term view, he said, adding that while in the short term, Brexit makes it hard to invest, in the long run, businesses will always find a way to make money.
“The UK is pro-business and has the rule of law. Brexit hasn’t so far had as much impact on the economy as many forecast, and in the long term the impact is likely to be mitigated by other factors,” he said.
“As it stands, valuations are so attractive the UK looks good for patient investors, but you do need to be patient.”
What it will take to bring investors back to the UK market, according to Lowcock, is an indication that Brexit is resolved, “almost to the point of any outcome”.
“Just something that enables investors and businesses to move forward,” he argued. “At his point, it is hard to see when that would be.”
Performance of FTSE All Share vs MSCI World ex UK since EU referendum
Source: FE Analytics
Tony Yarrow, portfolio manager and founder of Wise Funds, agrees, arguing that the UK is currently facing two crises.
“One is about a complete lack of clarity over the outcome of Brexit; the other is about the political, constitutional crisis which has deepened alongside the Brexit process,” he explained.
The political situation is impossible to call, said Yarrow, who co-manages the TB Wise Multi-Asset Growth and TB Wise Multi-Asset Income fund.
Meanwhile, he said, “investors assume that the worst is ahead – from cliff-edge Brexit to Labour government – and that the correct course of action is to wait for clarification before returning to market.”
Yarrow said the experience of sell-offs of the past—for example, those of 2008-09, the mining bear market of 2011-15, the Gulf War of 2003, the European sovereign debt crisis of 2011—tells us the market bottoms before each crisis has ended.
“Investors who remain on the sidelines tend to miss the first 20 – 30 per cent of the rebound,” he said.
The UK market is at an inflexion point, said Ken Wotton, managing director of quoted investments at asset manager Gresham House, as political uncertainty in the UK continues to take a toll on markets.
“We are likely to see greater sentiment-driven volatility over the coming months, as the benign environment of the first half is overtaken by heightened concerns about political and macroeconomic uncertainties both domestically and globally,” he said.
“We do not expect a major sharp correction in the UK, given the relative value of UK equities, but we do expect more sporadic periods of volatility.”
In terms of his own portfolio, the micro-cap specialist said that he is focusing on more defensive companies and avoiding more cyclical stocks.
“We believe we can mitigate the risks of greater volatility by focusing on the long-term fundamentals of companies and pick stocks that are profitable, cash generative, pay well-covered dividends and can benefit from structural growth trends in their end markets.,” he explained.
“We look for companies with sustainable competitive advantages and strong management teams with the ability to be agile in the face of a changing market environment.”
Performance of US dollar & euro vs sterling since EU referendum
Source: FE Analytics
However, the fact remains that it is much easier to invest elsewhere in the world, according to Jason Broomer, head of investment at Squire Mile Investment Consulting and Research.
“Clearly, investors are voting with their feet,” he said. “The more we learn about Brexit, the more we realise how complicated the implications are, even if we knew what the political resolution will be.”
Some time ago, Broomer’s team switched the bulk of their UK equity weighting into passives.
“We believe there’s little point paying expensive fund managers while such a binary political risk overhands,” the portfolio manager said. “Once we get a political resolution to Brexit, we shall reassess our UK positioning.”
Broomer believes a skilled fund manager should find themselves in a “target-rich” arena for picking winning stocks.
“Their skillset is peering through economic and business uncertainty, not guessing which way the political winds will blow,” he concluded.