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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
No one likes us, we don’t care, as the refrain from Millwall Football Club fans goes. For UK stocks, this sentiment may be one of the biggest selling points.
To say the UK stock market has fallen out of favour in recent years is something of an understatement. At this point, it is looking rather friendless. But some plucky diehards are asking the question one more time with feeling: is it time to buy UK stocks?
Heaven knows we have been here before, as regular readers will attest, and every time those green shoots wither away. UK stocks have gone the best part of nowhere for years, while the US market has sailed higher and sucked in all the shiniest new listings. Still, the degree to which UK markets find themselves in the cold might suggest, if you’ll excuse this most politically loaded of song lyrics, that things can only get better.
Data from the UK’s Office for National Statistics released earlier this month showed that UK pension funds and insurers have cut their holdings of domestic stocks to the bone. Back in 1997, they held a combined 45.7 per cent of UK quoted shares, the ONS said. By the end of last year, that had dropped to 4.2 per cent, the lowest on record. Some of this is down to changes in pension fund regulation, the ONS notes, but as it also rather drily points out, some is because of investors “expecting more profitable returns on overseas shares”.
Barclays describes the shift out of UK assets, which has now run uninterrupted since 2016 (can’t imagine why) as an “exodus”. Overseas investors are comfortably the largest holders of UK stocks, the ONS noted, but their slice of the market — now about 58 per cent — has barely budged since the mid 2010s. In Barclays’ words, “ownership remains depressed with huge outflows and little interest from global investors”.
As pedants never tire of pointing out, every seller of a share needs a buyer. There’s no such thing as a sell-off. In the narrowest sense, that is of course true. But it’s hard to argue that UK stocks are the must-buy hottest tickets in town or that prices and therefore investment prospects do not respond to demand. In fact, the biggest buyers of shares in UK companies are . . . UK companies, which have been scooping up their own droopy equity in share buybacks. There’s nothing wrong with that in itself, but again, it is not the strongest calling card for fund managers looking for juicy opportunities. No wonder they look elsewhere.
And yet, Barclays reckons the UK is looking “attractive”, through a combination of potential sterling weakness — a boon for that large part of the FTSE 100 that derives revenues from abroad — generous dividends and the notion that “a lot of bad news appears to be priced in”.
Simon Gergel, chief investment officer for UK equities at Allianz Global Investors, is also not giving up. “It is darkest before the dawn,” he said at a briefing last month. Indeed, he sees the market’s lack of friends as a benefit.
“The UK stock market is a rich opportunity set following massive outflows of funds and a massive re-rating,” he said. Now, “everyone who wanted to sell has sold. There’s no one left to sell, really. Almost.”
Some things are cheap for a reason, but some causes for optimism do stand out. One is politics. Typically, at this stage of an electoral cycle, analysis starts landing from banks and investment firms warning of market weakness ahead as fund managers price in political “uncertainty” — that most flaky of terms. Now, though, with a UK general election next year, political nerves are notable by their absence. The lazy argument that Labour governments are bad for UK stocks or bonds is rather undermined by investors’ recent memory of the Liz Truss administration. Most fund managers shrug off the potential for serious volatility when the next election lands, and in any case, US and European politics are not obviously less chaotic. “The UK is looking like a safe haven to me,” said Gergel.
Pictet also last month made its first private equity investment in the UK — a £50mn injection in facilities management company Pareto. “We tune out short-term political and economic sentiment — it isn’t helpful,” said the Swiss asset manager’s head of direct private equity Edmund Buckley, adding that he has a “war chest” of £200mn to invest in UK companies in the near future.
Another positive is that, sure, the UK economy may be rather drab and bruised. But it is no longer in clearly worse shape than other big economies in Europe. And with about 60 per cent of listed UK company revenues coming from abroad, a bet on the UK is more of a bet on global growth than it is on the UK economy itself. That could of course backfire. If big central banks, notably in the US, have overcooked rate rises, then a grim recession could well be just around the corner, just as investors have, on aggregate, flipped to an optimistic belief in a soft landing. Plenty of investors also still prefer to avoid buying British in 2024. UBS Wealth Management, for example, has put the UK in its “least preferred” bucket for the year.
Still, for now UK stockpickers are more focused on external shocks rather than unforced domestic errors. That feels like progress.