03 Nov 2020
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Where are we now? The FTSE 100 has fallen from its giddy heights of just over 7,600 at the start of 2020, down to trading around 5,600 in recent weeks. The market has seen some recovery from the lows of late March, but the recent levels still represent a drop of around 26% since the start of the year, indicating just how unloved the UK market is.
The UK is now under owned by institutional global investors who no longer allocate as much to the UK. Thanks to Brexit and the economic ramifications of Covid-19, clouds on the horizon have created uncertainty over investment in the UK market. To make matters worse, some UK investors are no longer allocating to the UK.
Recent figures from the Investment Association (IA) showed that £2.7 billion was withdrawn from the UK equity sector in the three months up to August. This is reflected in a report from Mercer who uncovered in a recent survey that the allocation to the UK has fallen from 20% in 2019 to 18% in 2020. Pension funds are allocating less to equities in general and less to UK equities, a trend that has become entrenched in recent years, creating a pattern that is showing no signs of changing.
There are some peculiarities in the UK market that may be contributing to its fall from favour. The make-up of the UK stock market is not particularly reflective of the UK economy. It’s highly cyclical and geared towards the global economy in that there are large weightings to global banks and to mining companies. Major oil companies such as BP and Shell make up a large proportion of the market and as the global economy is struggling, these businesses are following suit. Looking forward, the UK market could well outperform when we do have sustained global economic recovery, but that is looking a little way off and the cyclical element may currently be contributing to its unpopularity.
What should investors know and what decisions should they be making? Providing a well-diversified investment portfolio for a client does not mean ditching the UK altogether, but the emphasis is now on being selective about the funds and stocks within a portfolio. UK equity fund managers say that there are great UK investment opportunities out there despite the gloomy headlines.
Some sectors of the UK market such as retail, leisure and hospitality may be structurally hampered in the long-term as the impact of the coronavirus will drive more permanent change. If there is no significant recovery to pre-Covid-19 levels, companies in these areas will be worth less and less. If you do sell your UK stocks, are you crystallising your losses and potentially missing out on an eventual rebound? The short-term outlook for the UK stock market is bleak but investors selling off their UK equity funds may be acting with undue haste.
There are companies in the UK marketplace that are very attractive from a valuation point of view, but investing in this type of business could be risky as it’s difficult trying to predict the bottom of the market and there is a danger that you will lose money before it turns.
Given that UK economic growth figures have been significantly depressed, how can investors make sense of which UK stocks might be a good long-term investment choice, and which ones will not stay the course? Analysts are saying ‘invest in what you know’, a mantra that has served investors well for decades but could be particularly relevant right now.
According to the latest FTAdviser poll, advisers are almost evenly split on whether they are positive about the outlook for the UK market in the year ahead. The data shows that 37% of advisers are likely to increase their exposure to UK equities, with 33% implying the reverse.
The UK market may still be unpopular and cheap but with hope for a vaccine and a positive conclusion to Brexit negotiations, there’s cause to suggest that the love will return in 2021 and beyond.
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