We unpacked the latest iteration of our DFM sentiment indicator just before Christmas, and unlike most of the gifts we unwrapped back then, we are still able to enjoy it in January.
As we have covered recently, allocators have become much more positive towards bonds and much more negative towards European equities.
But we also found that allocators view the UK more optimistically than any other equity region, with 54 per cent feeling positive and only 18 per cent feeling negative.
This is considerably higher than their mood regarding equities as a whole, with just one-third of DFMs positive on the asset class. And it is dramatically more confident than their outlook on the US, with just 9 per cent found to be optimistic about the prospects for Wall Street.
Several of the experts we spoke to said the UK had been long undervalued and the market looked cheap in comparison to its peers on the global stage.
Other allocators were keen to stress the appeal of international companies within the FTSE acting as a hedge against the UK’s precarious economic outlook, and the resilience of energy stocks as a buffer against geopolitical tensions and oil price shocks.
Among them were the folks at Tatton, who had this to say: “UK equities are notably cheaper than global counterparts on a price-to-earnings basis, reflecting years of neglect by foreign investors. Valuations hence have plenty of room to climb and – since we expect positive bond market movements – Britain looks good value.”
But such lofty ambitions have not yet translated into action among allocators.
Throughout 2023 we covered the decline in average allocations to UK equities in our database. It fell from 15.3 per cent to 14.1 per cent during a year in which many value sectors thrived and if you look back to 2021 the dropoff is even steeper, from 17 per cent.
The FTSE actually delivered a return of 3.8 per cent in 2023, respectable in some years but less than the offering on cash right now.
There have been significant sell-offs of the UK’s once-most popular growth funds, Liontrust Special Situations and Lindsell Train UK Equity, while Royal London Sustainable Leaders is one of the few domestic equity funds to have seen demand increase over the period.
Though it’s worth noting that not all allocators share the same sense of optimism surrounding UK equities.
Thomas Gehlen, senior market strategist at Kleinwort Hambros, said: “The UK is grappling with persistent inflation and a sluggish growth outlook. Among its peers, it faces the greatest risk of suffering a hard landing triggered by the Bank of England’s tighter-for-longer monetary policy.”
He added that Kleinwort continues to like the attractive valuations of Britain’s multinationals, but they have cut exposure to small and medium enterprises that they see as more closely tied to domestic consumption and financing.
The house with the largest allocation to UK equities is Premier Miton at 22 per cent, while the allocator with the lowest allocation is HSBC Asset Management at 2.2 per cent.
Of course allocators may have other exposures to UK equities through global funds, as our data is only monitoring exposure to UK equity funds.
As 2024 progresses we will keep an eye on whether allocators turn their thoughts on UK equities into actions in 2024.
