A recent Financial Times report suggests that international investors are shunning UK-listed equities, which the specialist financial media says have become ‘the most unpopular asset class in the world’. A recent Bank of America survey quoted in the piece found that British stocks are currently the biggest short position among 163 global investment portfolio managers polled. With the April 5th deadline looming and annual allowances being used up or topped up over the next few weeks, should British investors be following suit for the best stocks and shares ISA returns?
Asset managers’ confidence in UK equities is said to have hit its lowest level since the international financial crisis as Brexit uncertainty combines with a weak corporate earnings outlook. UK stocks are not only unpopular within the context of other geographies in the developed world, such as the USA, Eurozone and Japan. The list that they finished bottom of was comprised of 22 asset classes including emerging market equities, bonds, cash and industry-specific equities indices such as banks and tech.
Despite lagging peers last year, the FTSE 100 finished 2017 strongly and in mid-January of this year reached a new record high. A late January to early February fall, which mirrored corrections on Wall Street and elsewhere. Many market commentators welcomed the correction on the argument that it had taken some of the steam out of an overheating bull run. There has also been the argument that, having already seen more modest gains than elsewhere during 2017, the recent correction meant that UK stocks currently offer among the best value internationally. However, it seems that professional institutional investors are of the opinion that they are cheaper for good reason.
Britta Weidenbach, Deutsche Asset Management’s head of European equities is quoted in the FT as saying that the UK is currently the weakest economy in Europe and set to post the worst 2018 corporate earnings growth of any major international stock market.
However, before shunning the UK for any last minute ISA allocations, the position that UK equities are the least desirable in the world right now is not universal. Neil Woodford, one of the best know, and consistently successful fund managers in the UK believes the pessimism is unjustified. He comments:
“There’s a consensual view that the UK economy is challenged by inflation, a lack of real wage growth and of course Brexit issues and political uncertainty. When you go below the surface . . . I see an economy with more people in work, with more wage growth, less inflation, a bit more investment spending, continued recovery in manufacturing and exports, and I see an economy growing by 2 per cent rather than the recession that some people are forecasting.”
JPMorgan Asset Management has also taken a contrarian position across many of its global portfolios to go overweight on UK equities. The best stocks and shares ISA returns might, therefore, not come from bailing out of UK equities but taking advantage of the pessimism around them to pick up bargains. As always, judging when values are bottoming will be difficult. It may well make sense to diversify internationally, with a UK allocation, with any remaining 2017/18 ISA allowance. Drip feeding a chunk of 2018/19’s allowance into UK equities to spread the risk of getting timing right is a contrarian approach that, if Woodford and JPMorgan are right, may longer term reap rewards.