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By: Nigel Green | deVere Group
The UK is the world’s least-loved major market – but it’s not all Brexit’s fault, affirms a leading analyst at one of the world’s largest independent financial organizations.
Tom Elliott, International Investment Strategist at deVere Group, comments ahead of a crucial Brexit summit on Friday at Chequers, the UK Prime Minister’s country retreat. At the crunch meeting, the cabinet will thrash out Britain’s favoured economic relationship with the EU.
Mr Elliott comments: “The UK is the world’s least-loved major market – but it’s not all Brexit’s fault."
“According to the much-quoted Bank of America Merrill Lynch monthly global survey of fund managers, the U.K 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.
“The UK economy grew at a rate of 1.2 per cent in the first quarter, year-on-year, compared to 2.5 per cent in the euro area and 2.8 per cent in the U.S. Investors follow growth, because that is where stronger corporate earnings will be found which, in turn, will help support share prices.”
He continues: “However, 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.
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“The fall in sterling immediately after the Brexit vote helped boost the blue chip FSTE 100 index, since 70 per cent 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 per cent of the S&P500.”
Mr Elliott adds: “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 per cent in cash to take advantage of any market sell-off - a sound investment tip, irrespective of Brexit.”
deVere’s International Investment strategist concludes: “If a soft Brexit appears likely, re-investment in the UK stock market would make sense, with a bias towards small and mid-cap stocks that are more sensitive to improving domestic economic growth prospects than FTSE 100 blue chips.
“However, 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.”