The UK investment market is the world’s least-loved major market, but it’s not all Brexit’s fault, according to an analyst from one of the world’s largest independent financial organisations.
With Brexit looming, there has been much uncertainty surrounding the UK’s ability to attract global business after March 2019, with recent news that international companies such as Unilever and Airbus are set to relocate fuelling doubts further.
This week, UK leaders will attempt to thrash out some of the finer details, including Britain’s economic relationship with the EU, at a Brexit summit at the Prime Minister’s country retreat Chequers.
The UK investment market is unattractive, according to an investment strategist
However, for international investment strategist at deVere Group Tom Elliott, this is not entirely down to Brexit:
“According to the much-quoted Bank of America Merrill Lynch monthly global survey of fund managers, the UK is at the bottom of global investors’ list of favoured developed stock markets, and The Times last month quoted a report from The Investment Association that since the Brexit vote two years ago, £7.9bn has been removed from UK equity funds.
“The cause is probably Brexit, which has contributed to a fall in investment and consumer confidence, leading to disappointingly weak underlying economic growth.”
However, he attributes this, in part, to the domination of ‘old economy’ value stocks:
“Another explanation might be that UK blue-chip stocks are simply unfashionable. The UK stock market is dominated by ‘old economy’ value stocks, such as energy, consumer staples, utilities, banks and insurers.
“The fall in sterling immediately after the Brexit vote helped boost the blue-chip FSTE 100 index, since 70% of FTSE 100 corporate earnings are in foreign currency. But that was a one-off move in the currency. In contrast, value, as an investment theme, has been out of fashion for some years. Instead investors prefer ‘new economy’ growth stocks, in particular the technology sector – which is barely represented in the FTSE100, while comprising 25% of the S&P500.”
Unsurprisingly, whether the country opts for a hard or a soft Brexit will play a part in how attractive the UK investment market is. In October last year, the Organisation for Economic Cooperation and Development cautioned that a no-deal Brexit could wipe £40bn off the UK’s GDP growth by the end of 2019. Elliott added:
“Until we have a clear signal from the UK Government what sort of Brexit it wants (‘hard’ or ‘soft’), forecasts for the UK economy and financial markets — including the value of sterling — are highly speculative. This, together with the momentum currently being had from growth stocks, justifies a move by UK investors away from their home market and into a truly global, diversified portfolio. In addition, keep 5% in cash to take advantage of any market sell-off – a sound investment tip, irrespective of Brexit.
“A hard Brexit will lead to a further deterioration in the outlook for the UK economy and weakness for small and mid-cap stocks. A further fall in sterling will accompany a hard Brexit, flattering many FTSE 100 companies’ shares to rise due to the currency translation effect on their foreign earnings.”