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Investor confidence sinks to record low in 2017

13 December 2017

Hargreaves Lansdown research shows a serious disconnect between investor sentiment and UK stock market performance.

By Maitane Sardon,

Reporter, FE Trustnet

Investor confidence has fallen to its lowest levels on record over the course of 2017, research by Hargreaves Lansdown shows.

The HL Investor Confidence index, which polls between 250 and 500 of the platform’s clients on a monthly basis, has fallen to its lowest annual level since it began in 1995. This suggests investor sentiment is now lower than during events such as the tech crash, the Enron scandal, the second Gulf War and the global financial crisis.

The index averaged 76 points across 2017 and, when combined with an average of 78 during 2016, represents a prolonged period of poor sentiment among investors, with analysts highlighting the current UK political and economic environment as main causes of low investor confidence.

It must be noted that the index has been lower on a monthly basis in the past – for example, it dropped to 61 points in March 2008 during the financial crisis and 59 points in November 2016 during the US presidential election.

Hargreaves Lansdown Investor Confidence index


Source: Hargreaves Lansdown

However, the latest reading of 67 in December represents the lowest monthly figure recorded in 2017 and was sharply down from 77 in November.

There is some evidence that investors have become more anxious as time has gone on: the average level of the index has been 10 per cent lower since the financial crisis than before it with the average reading prior to July 2007 being 107 but falling to 96 thereafter.

But Laith Khalaf, senior analyst at Hargreaves Lansdown, added that investor confidence has been damaged more recently by the UK’s decision to quit the EU.

Those who voted to remain in the EU are “still pessimistic about the effect Brexit will have on the UK economy”, he said, while the current post-Brexit political scenario has led investors to be “naturally wary of a sudden change in government and what this may mean for the UK stock market”.

“The UK economy and the stock market are of course two very different beasts, as evidenced by their divergent performance of late, however there is inevitably some contagion in sentiment from one to the other,” Khalaf pointed out.

“The Brexit blues have compounded an already downbeat mood that has dogged sentiment since the financial crisis, following which investor confidence has been noticeably dampened.”

This recent fall in confidence among private investors has come at a time when the UK market reached new record highs at several points during the year.

“There is a serious disconnect between investor sentiment and what’s going on in the UK stock market right now,” Khalaf said.

“Investor confidence is pretty low, largely because the UK faces a changeable political and economic situation, as a result of Brexit and the 2017 general election, while the financial crisis still casts a long shadow over proceedings. At the same time, the Footsie is flying high.”

Hargreaves Lansdown Investor Confidence Index vs FTSE 100


Source: Hargreaves Lansdown

Jason Hollands, managing director of Bestinvest, said: “It seems that many investors are growing anxious about a possible stock market ‘correction’ having enjoyed yet another year of buoyant returns on their stock market investors in in 2017.

“It is undeniable that this bull market has gone on for a long-time, but is also the case that bull markets do not merely die of old age – they typically end when there is either a deterioration in macroeconomic outlook or a shock trigger event to spook investors.”

Looking at other recent surveys on sentiment and there is also a clear disconnect between the confidence of UK private investors and professional asset allocators.

The most recent BofA Merrill Lynch Fund Manager Survey found professional investors’ global appetite for risk has increased, with 16 per cent of those surveyed saying they were taking above-normal levels of risk in their portfolios in November.

As well as increasing risk in their portfolios, the research found investors aren’t overly worried that markets will fall, with the net share of investors taking out protection against a correction in markets decreasing to minus 37 per cent.

However, BofA Merrill Lynch research also showed that professional investors think the UK is a poor place to invest, as pessimism toward UK equities continues to rise. There is now a net 37 per cent underweight to UK equities among global fund managers, marking the return to lows last seen during the financial crisis.

While UK equities have made positive returns this year, the domestic market is lagging its global peers – as the below chart shows.

But despite poor investor sentiment, money continues to pour into funds from UK clients. The latest data from the Investment Association covering the year to October, shows that 2017 has been a record breaking year for fund sales, with only three months of activity left to report.

IA monthly statistics of UK investor behaviour shows net retail sales totalling £38.8bn so far, making 2017 the best-selling year on record.

Performance of indices over 2017


Source: Hargreaves Lansdown

Khalaf noted that fund inflows have been driven by “investment in overseas funds, mixed assets funds and bond funds, which have continued to see positive flows despite rising interest rates in the US and latterly in the UK”.

But not all sectors have attracted money and the UK is one notable area to suffer. Khalaf added: “Funds investing in the UK stock market in particular have struggled to keep bums on seats. Over the 10 months to October 2017, retail investors withdrew £2.2bn from UK equity funds. UK investors, it would seem, are particularly downbeat on their home market”.

The IA UK All Companies sector has been the hardest hit by redemptions and FE Analytics shows that the Invesco Perpetual High Income comes off the worst after seeing £1.3bn of net outflows over the past 12 months.

Other big funds witnessing large outflows were Scottish Widows UK All Share Tracker (£970m), AXA Framlington UK Select Opportunities (£890m), Invesco Perpetual Income (£815m) and M&G Recovery (£794m).

Not all of the sector’s members posted outflows, however. BlackRock ACS UK Equity Tracker has taken in £2.7bn over the past year, CF Lindsell Train UK Equity £926m, Vanguard FTSE U.K. All Share Index £918m, Liontrust Special Situations £619m and Royal London FTSE 350 Tracker £552m.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.