The debacle that has become Brexit has seen UK equities become the pariah of the stockmarket world since the referendum in June 2016.
However, our exclusive Wealth Manager quarterly survey suggests there are real signs the love is returning. Despite near-zero transparency on the short-term outlook to the country’s most significant political and economic challenge since the war, 50% of readers who completed the survey said they were now overweight the FTSE.
That was a dramatic increase over the quarter, from just 18.8% overweight UK stocks at the end of 2018, while 37.5% were actively underweight.
Raymond James investment manager Will Clarkson said: ‘UK Equity looks extremely undervalued relative to other markets’.
Meanwhile, JM Finn investment research manager Brendon Company believes UK stocks will offer the best returns over the next 12 months, an outlook shared by most wealth managers.
The sell-off in UK equity during 2018 caused the third most aggressive negative rerating since 1990, albeit from PE multiple valuations which many considered to be at the high end. The FTSE All Share currently yields 3.8% – versus a 1.2% 10-year gilt yield – and would need to either soar 35% or experience a 25% fall in dividends in order to restore it to its historical average.
Even allowing for a steady drumbeat of bearish managers warning of an imminent correction, that may be considered an outlying risk, given that dividends fell just 15% during the 2008/2009 crash.
Taking the long-term view, readers’ outlook on the UK stock market was the most positive since our 2014 Q4 survey. If indicative of the sentiment of fund investors more generally, this could signal the reversal of a trend that has – according to Investment Association figures – seen around £11 billion in outflows from UK equity funds since the Brexit referendum and £3.9 billion pulled from the UK All Companies sector in 2018 alone.
Nearly three years on from the vote, there remains little certainty on what form the departure will take – or even whether it will happen at all. While readers were far from risk averse, there did seem to be an element of a barbell risk management strategy, while the number of readers holding an overweight in gold increased from 18.8% in Q4 2018 to 30%.
Just as Brexit has proved divisive among politicians – and the country as a whole – it has also divided our readers: between those who see it as a storm in a teacup and those view a no-deal scenario as a real threat.
With such an eventuality in mind, Clarkson, who was among the most vocal of the respondents, said his plans included holding a ‘mixture of domestic UK stocks and ones internationally focused.’ He added that he was maintaining an overall neutral exposure to the pound ‘with international holdings of assets balanced off against UK holdings.’
On the other side of the fence – in an example of the extent to which opinions can differ both in one firm as well as the industry – fellow Raymond James wealth manager Bill Hunt (pictured) said that he was not hedging ‘as a deal will be forthcoming, so why waste money?’
One investment manager who preferred not to be quot
e UK, while another said they would be ignoring day-to-day events and focusing on looking for value.
Once we get a bit more clarity on Brexit, a concern expres
ed said they would be holding gilts but maintaining little other exposure to thsed by JM Finn’s Company was that there could be a backlash and ‘public unrest’ if pro-Brexit constituents feel MPs disregarded their wishes.
Though wealth managers were largely split between these nonchalant and watchful attitudes towards Brexit, most including those who were personally relaxed, said it was the major source of anxiety for their clients, while market volatility was cited by some as another big concern.
When it came to the global economy, Hunt said: ‘I expect a Goldilocks scenario of stable growth and no overheating or recession and a good period for equity investors’. This was in accordance with his view investors should be ‘near fully invested or you’ll miss out’.
Respondents were slightly more optimistic on the prospects for global growth than last quarter, with 36.8% predicting output would rise – up from 31.6% in our previous survey – and 52.6% saying they expect it to change little.
One reason for this might be the opinion expressed by Clarkson, that ‘easing trade fears and better prospects for European earnings will offset any slowdown in China.’
Emerging market equity was viewed particularly positively as an asset class, with 60% of readers overweight – slightly over double the percentage in late 2018.
Hunt believes Asian equities offer the most upside of any asset class in the next 12 months, while 10% of respondents were overweight and 45% were underweight emerging world debt. Hunt said he saw high yield credit as this year’s riskiest investment.
Despite the hope for a resurgence in emerging markets, Company said private client fund managers should take note that ‘experts are calling for global recession [in] 2019 – already pushing out to 2020’.
The general view on the US market was subdued, with only 25% of readers overweight – the lowest proportion since the second quarter of 2018 – while 50% were neutral and 25% below the benchmark.
Clarkson said the biggest risk he sees in the next year was in the asset class: ‘if there is any more escalation in trade wars’, while Hunt said Donald Trump presidency remained a leading worry for clients.
Another region to suffer notably among survey takers was Europe, with 45% now underweight European equities. That is more than triple the proportion who held this view last quarter, with only 5% now holding a positive outlook – the lowest percentage since we began conducting our survey in 2011.
This glum outlook accords with that of Capital Economics, which in an update last week highlighted that in Europe ‘on a three-month-on-three-month basis, production is still contracting sharply’. While the consultancy said there could be a modest uptick, it does not anticipate a ‘sustained or substantial rebound’.
Readers were more optimistic about investor sentiment than last October – with 36.8% expecting it to improve, up from 14% – while 40% said they expected corporate profits to rise, 50% expected them to change little and 10% forecast that they will fall.
Interestingly, this time no readers gave the highest confidence answers ‘improve significantly’ or ‘worsen significantly’ available for macroeconomic questions – perhaps due to lingering uncertainty inflicted by last year’s sell-off.
The survey ran from 27 February to 1 March