Consistently, since the Brexit vote, fund manager surveys have found that global investors view UK equities as the least attractive asset class. And, it is even unpopular with domestic investors – the UK unit trust sector has typically seen net outflows over that period. Perhaps understandable as eurozone growth resumed, but it looks now like an emotional response; pessimism overdone. 
Economic evidence is mounting in the UK’s favour. Will investors wait until Brexit negotiations are finalised, or is there a case now for being ahead of the herd?
Amidst the Brexit uncertainty, the UK economy has proved relatively resilient this year. The strongest UK signal is the resumption of real wage growth, which will reverse the consumer squeeze. Inflation appears to have peaked at the end of 2017, and is likely to ease further this year.
Already, it is falling faster than the consensus and the Bank of England expected, helped by sterling’s recovery. Indeed the strength of sterling is perhaps the clearest indication that confidence in the UK is returning. It is just that this reappraisal has yet to transfer to shares.
Optimism on Brexit negotiations, and the extended period of transition, has encouraged the UK currency recovery.
This year sterling has gained against the dollar – at one point more than 4 per cent. The prospect of further progress in sterling is encouraging cash rich overseas corporates to accelerate any plans they had for UK acquisitions. Merger activity has been strong to date this year, with bids for major companies such as Fenner, Fidessa and Laird, along with more recent approaches for Shire. Corporate buyers seem to see the value in the UK market, even if institutional investors do not.
Investors may fear a UK economy becoming increasingly disconnected from the eurozone. It does not seem to fit readily within a European equity allocation. But Europe itself will always have differences. Despite all that is said about accelerating political and monetary union in the core of Europe, there are both political and economic signs of divergence. It is less clear that the UK is the anomaly in an otherwise aligned Europe. The media could change its Brexit narrative if the European integration project falters.
Instead, there may be attractions in a UK economy that retains control over its own monetary policy and some aspects of trade. Investors cannot afford to ignore the world’s fifth biggest economy and arguably also the most important financial centre.
In the MSCI World index, UK equities have a weighting that approaches France and Germany combined, and is two-thirds of Japan. It looks big enough in its own right to merit distinct consideration from investors, much as Japan is typically allocated separately from others in Asia.
Developing more idiosyncratic risk in UK equities may in time be seen by global investors as an attraction – an opportunity to hire specialist managers exploiting a market with relatively easy M&A, and good technology uptake.
Before the year is out, progress on Brexit is likely, encouraging a return of overseas investors. The UK market also has many attractive businesses using a scalable, capital-lite approach. These business models have potential to lock-in superior returns on capital and better than average growth for several years. UK mid caps, in particular, have offered good opportunities for stockpickers in recent years, outperforming the FTSE 100. In contrast, the risks may be in cyclical and low margin businesses - particularly if more exposed to the global economy.
Panics can force share prices down below fundamental value as investors scramble to offload perceived risk. The fact that sterling has bounced 16 per cent from the depths of the Brexit vote panic shows how much emotion came into play at the time. Economic fundamentals rarely move that far that fast.
Undoubtedly, the extreme shift in sentiment has been in part driven by press coverage, both in the UK and abroad. Yet, despite the attention given to politics, it rarely drives long-term investment returns. As 2018 progresses, investors could begin to see the opportunity in UK equities as a value investment.
Margaret Lawson, co-fund manager of SVM UK Growth. The views expressed above are her own and should not be taken as investment advice.