With lockdown restriction easing, the FTSE indexes booming and conventional wisdom pointing to valuation opportunities, Chris Darbyshire, CIO at Walker Crips, comments on why global investors may still be avoiding UK assets.
Investors in UK companies are enjoying some of the best returns in years, and the smaller down the size-scale you go, the better it gets. The FTSE 100 has rallied though is still 10% or so below its peak of 2018, but the FTSE 250 and FTSE AIM reached new all-time highs recently.
Conventional wisdom is that, unlike equities in other markets, the UK currently offers a reasonable valuation opportunity for international investors. Brexit risks have faded as it becomes more of a known quantity, the B117 UK variant of the coronavirus was crushed by lockdown and the UK’s vaccination programme puts it at the forefront of the recovery. Meanwhile, the government continues to provide a healthy amount of stimulus spending.
However, the pound sterling is the missing piece for international investors. Typically in bullish environments, GBP can be relied on to add substantially to returns on UK assets. Although it has recovered from its pandemic lows, its momentum in the early part of this year has faded and, at $1.40 to the dollar, the pound still sits well beneath its referendum-night level.
This is somewhat puzzling. Currencies are more vulnerable to political risks than other asset classes but, with the Conservatives still holding an eight-point lead over Labour, investors don’t have to worry about Labour policies and the threat of a Scottish independence vote is seemingly years away.
Nevertheless, it’s possible global investors are still avoiding UK assets. The acrimonious post-Brexit dealings with the EU have hardly inspired confidence in the prospects for the UK’s biggest trading relationship. Actions by the British government to walk away from its treaty obligations with the EU set a worrying precedent, and are hardly likely to encourage EU investors. Elsewhere the EU is aggressively encouraging providers of financial services – one of the UK’s biggest exports – to relocate. As long as the status of the financial services industry’s ability to export to the EU is in doubt, the pound’s wounds may not fully heal.”