Have UK equities bounced back?

Ben Conway, chief investment officer at Hawksmoor, says one of the reasons outflows have been so substantial is that as institutional investment firms have become larger, they have switched their investment strategy to ensure that equity exposures are in line with indices, and as the FTSE is only around 4 per cent of the global market, those investors have been consistently selling.

He adds that the political climate in the UK in recent years has also served to dent sentiment towards the domestic market. 

Conway feels both of those trends are receding, with institutions having almost completed their selling, and, in his view, the political outlook less binary.

But the other challenge faced by investors looking at UK equities is that the gains have been concentrated in a relatively small number of stocks – companies that benefit from higher inflation, such as miners, or higher interest rates, such as banks. 

The recent weakness of sterling relative to the dollar has also boosted the returns as more than half of FTSE 100 corporate earnings are generated in overseas currencies, but reported in sterling. 

Simon Murphy, UK equity fund manager at Tyndall, says his view has long been that while the political and economic environment in the UK has been poor, “it was never as poor in reality as sentiment pointed towards it being”. 

For example, all commodities are traded in dollars, so when a London-listed mining company gets paid for its commodities, it sells the dollars of profit made and buys sterling to pay its dividend, a stronger dollar relative to sterling means more sterling can be bought, and distributed to shareholders. 

Investors are getting nervous about not owning UK stocks.

Tom Moore, Abrdn

But trends such as higher rates and currency weakness are necessarily cyclical in nature, and present the challenge for advisers and wealth managers around how to build a UK equity portfolio that is diversified in nature. 

Trevor Green, head of UK equities at Aviva Investors, says that while equity markets have generally been boosted by an increased tolerance of risk from investors, what is unusual is that such a change in risk appetite usually means greater demand for small caps, but this is not currently happening. 

He says the reasons for this is the returns currently being delivered by sectors such as banks are sufficiently compelling that investors have not had sufficient incentive to move further down the market cap scale.