UK Stocks ETFs have started seeing some positive flows once again, after the sector has been strongly out of favour with investors for months due to concerns over the Brexit and its implications for the domestic market.
Confidence in the UK has been low since the historic decision of the British public to leave the European Union, made during the referendum that took place on 23 June 2016. The markets were shocked by the vote, and have been rocked by the uncertainty that such a decision brings ever since, with the UK often named the most unloved major stock market in the world.
Fears over the future of the country after the cumbersome Brexit process finally comes to an end have affected foreign direct investment into Britain, with the figure for 2016 dropping to $15 billion, only around a third of the average amount since 2011, and the lowest since 2005.
Meanwhile, over the past year to 3 May, UK Stocks ETFs have suffered outflows of €1.6 billion, according to TrackInsight data, with the rout deepening throughout 2018.
But over the recent month investors appear to be returning to UK assets, with cumulated flows reaching €254 million over the period. Over the same time, UK stocks have appreciated 4.5%, having mostly seen negative performance for the majority of 2018 until now.
Growth disappointments and sterling volatility
To a large extent the strong returns have been driven by the recent volatility in the pound, a key driver of UK large cap stocks. Having reached post-Brexit highs, sterling dropped back some 4.5% at the end of April on the back of fears over UK growth prospects.
Figures at the end of April revealed the UK economy had growth just 0.1% in the first quarter of the year, marking a five-year low, while UK manufacturing growth figures have shown a continued slowdown, with the seasonally adjusted IHS Markit/CIPS purchasing managers’ index dropping to 53.9 in April, from 54.9 in March.
Traditionally, falling sterling has an inverse relationship with internationally facing UK-listed large caps, which gain a boost from weakness in the pound.
But what is driving the flows into this unloved geography despite the low sentiment? It seems that it is precisely the unloved nature of the UK market that is now beginning to draw the attention of investors to it once again, and it is back on the radar of investment advisers and wealth managers.
For example, UK fund supermarket Hargreaves Lansdown has recently issued a note on why it might be worth considering investment in the UK stock market, given its unloved nature.
In the note, the firms says there is an opportunity in the current situation, and that “investors will be rewarded for their patience”, as many companies focused on the domestic economy can be bought at attractive valuations while sentiment remains low.
Meanwhile, Thesis Asset Management’s research analyst Ryan Paterson believes the UK equity sector has now become a contrarian play. He expects economic growth to pick up later in the year as confidence in the UK improves.