UK stocks have been among some of the least loved investments this year, with funds focused on domestic companies bleeding £6.6bn since January — already far higher than the £4bn pulled during the whole of 2016.
Yet despite weeks of political and market turmoil, culminating in the replacement of Liz Truss with Rishi Sunak as prime minister, stock pickers are buoyant on the long-term outlook for UK companies.
“In our view, with market conditions changing, we expect the UK stock market to outperform the US stock market,” said Gervais Williams, a fund manager at Premier Miton who invests in UK companies.
“The recent budget could have turned out badly, but being unviable it has been smothered at birth.”
Colin McLean, chief investment officer of SVM Asset Management, who co-manages its UK Growth fund, said he was “reasonably optimistic” on current valuations for UK stocks.
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“The issue for foreign investors is now political uncertainty and the significant risk of a general election and change of government,” said McLean.
“UK investors fear that a lurch into austerity will not be sellable to the British electorate and it will bring a steeper downturn. Investors seem willing to consider a Labour growth plan.”
But while there is optimism about the long-term outlook, international investors remain wary of the UK stock market.
Bank of America’s recent European fund manager survey showed investors had severely cut back on their exposure to UK equities in the month after Truss became prime minister, with allocations at their lowest level since November 2020.
Pictet, the Swiss asset manager, said at the start of November it had downgraded UK equities to neutral from overweight. UK stocks, Pictet added, had become “particularly vulnerable” given uncertainty on the “economic policy mix and fiscal credibility”.
Dan Kemp, global chief investment officer at Morningstar Investment Management, said investors will be looking beyond the recent turbulence in Westminster.
He said UK equities “appear to offer good value when compared to most other equity markets, with the added benefit of being priced in an undervalued currency”.
“The political turmoil of the last few weeks has hung a large ‘for sale’ sign on UK equities,” Kemp added.“Shopping in the ‘sales’ can be stressful and chaotic, but they tend to be the times when we get the best bargains. Such bargains may be the source of higher long-term returns.
“The challenge for investors is that the stronger the calming influence of the chancellor, the fewer great investment opportunities are available for those in the UK.”
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Meanwhile, Ben Jones, director of macro research in Invesco’s multi-asset team, said new UK chancellor Jeremy Hunt, “is being viewed by markets as the adult in the room” following the government’s U-turn on his predecessor’s mini-budget.
Jones added that while Hunt’s fiscal statement on 17 October is having a “mollifying effect” on the pound and UK gilts, it has had less of an impact on UK stocks.
“FTSE 100 companies generate approximately 75% of their earnings from outside of the UK and therefore the domestic UK has little bearing on the UK equity market,” said Jones.
“Large-cap UK stocks offer significant value in my opinion and the higher weighting in energy companies is particularly attractive too. That they have underperformed for many years and appear deeply unloved by investors, making them all the more attractive on a medium to long-term basis.”
Chris Kinder, a UK equities portfolio manager at Columbia Threadneedle, said political uncertainty in the UK is unlikely to alter persistent selling by some investors.
“The short term pressures and negative headlines will persist and those investors unable to tolerate this volatility will continue to exit,” said Kinder. “Those with longer dated investment horizons will continue to exploit the cheapness that this price-insensitive selling creates. In essence, we are seeing a sustained ownership change of UK listed assets.”
Kinder added the market would like to see “a less confrontational relationship between government, UK financial institutions and the broader business community”.
“All things being equal, these factors should at least help to mitigate the distressed selling of UK assets. Pressure will be placed on the next government to establish the parameters against which they would govern. The market will be sensitive to this,” he said.
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