UK equities are “clearly attractive”, according to Schroders’ head of multi manager Marcus Brookes, but Brexit uncertainty means the fund manager won't back his view.
While professional asset allocators are waking up good value to be found in the UK stock market, private investors disagree.
Morningstar Direct data show investors have withdrawn £14.5 billion from funds in the Investment Association UK All Companies sector since the beginning of 2016. Schroders says that many of its clients have never before owned less of the UK market in their portfolios.
But take Brexit out of the equation, says Brookes, and he says, "I think it’s clear we’d want to be overweight".
The price/earnings ratio on UK stocks is not demanding, earnings forecasts are not too bullish and there’s plenty of upside to sterling from current levels.
“If I was a corporate raider based in Japan or Europe or the US, I’d be looking at UK stocks thinking ‘my god, I can buy a world-class franchise on 15 times earnings where the earnings forecasts are pretty modest’,” Brookes adds.
In fact, Brookes says that one fund run by him and Caspar Rock, chief investment officer at Cazenove Capital, bought more UK equities in the first quarter of 2018. At that point, he says, the FTSE All-Share was down 9% since the start of the year, seemingly due to changing US monetary policy. “That didn’t make any sense.”
However, while he admits the attractions are obvious if you took Brexit out of the equation, he concludes “for the time being, we just can’t”. “While this is going on, we need to be very cognisant of the challenges Brexit brings.”
However, Brookes doesn’t rule out a change in positioning on the UK in the future. “When we get a clear view about what Brexit’s going to mean for UK economy, for UK business, I would be very willing to make a strong bet one way or the other on the UK,” he continues.
UK Not a Great Proxy For Global Equities
Rock, on the other hand, is much less optimistic on the UK. He says Cazenove has been underweight UK equities for some time. One reason for this is difference of opinion between the colleagues is Rock’s positivity for growth-type stocks, as opposed to Brookes’ current value-bias.
Rock notes that, despite the high proportion of UK blue-chip firms’ earnings coming from overseas, the UK market is not a great proxy for global equities. Take the tech sector as an example. Global equities indices have a 23% weighting to technology names, with the FANGs – Facebook, Amazon, Netflix and Google, and BATs – China tech names Baidu, Alibaba and Tencent, making up the bulk of that.
In comparison, tech accounts for just 1% of the UK market. “And when Micro Focus (MCRO) has a profit warning that proportion halves,” he cautions. That’s an important factor because tech companies have been the driving force in the latter stages of the current 10-year bull market in equities.
It’s also underweight healthcare compared to its global peers. Instead, the bulk of the UK market is made up of financials and commodities, which are cyclical industries that have been a drag on performance for a number of years now.
Combine that with Brexit uncertainty and economic growth that has gone from being the fastest-growing G7 economy between 2013 and 2016 to the slowest since the referendum in mid-2016.
