UK equities: Kissing frogs?
Being a UK equity fund manager since the European Union referendum has often felt like being the unwanted guest at the cool kids’ party.
As the glamorous S&P 500 has notched up regular all-time highs, returning over 80% since the referendum in sterling terms (as of 12 November 2019), the unfancied FTSE All-Share Index has returned just over 32%. Half of that return has come from dividends, with a miserly 16% from capital appreciation.
Despite the obvious valuation attractions of the UK market—a dividend yield of over 4.5% (Bloomberg) and valuations at near 30-year lows versus other equity markets—we have remained on the sidelines of the equity bull market party, consoling ourselves at the punchbowl, as investors have flocked instead to embrace more exciting growth opportunities elsewhere.
However, just like Cinderella, we might just be about to win the hand of the handsome prince.
The latest European Fund Manager Survey from Bank of America Merrill Lynch (BAML) has revealed a huge swing in sentiment towards the UK. When asked which equity markets they would overweight or underweight over the next year, a net 9% of European managers are now saying that they would overweight the UK. This represents the biggest swing in sentiment in the current survey, and was, for the UK, “…the highest reading since November 2014 and the third highest in the history of the question.”
Clearly, the BAML survey is just a measure of intentions over the next 12 months, which are subject to change. However, the picture builds when we look at where investors are currently positioned. While the survey shows that international investors continue, on balance, to hold an underweight position in UK equities, once again we can see a shift in attitudes. A net 21% of investors now say they are underweight UK equities, up from a net 32% who were underweight the previous month.
For overseas investors, equity market returns are just one part of the equation. Another part is currency. From the European Fund Manager Survey we can see that a net 50% of respondents believe that sterling is undervalued.
So, the unloved UK stock market has been shunned for over 40 months. Investors are now significantly underweight, while sterling looks undervalued. With UK equity valuations also looking attractive, this could be a heady cocktail for future returns—particularly if sentiment towards the UK shifts decisively and investors rush to cover their underweight positions and move overweight.
It could be time to start kissing frogs.
James Illsley is Portfolio Manager of the JPM UK Equity Core Fund and the JPM UK Equity Plus Fund
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