DFMs had already shunned UK ahead of record GDP plummet

A number of discretionary fund managers had already shunned the UK before its record GDP slump reading for the coronavirus lockdown period, which saw it significantly underperform other major economies.

The UK was last week revealed to have significantly underperformed the US, the eurozone and all other G7 economies when its Q2 GDP growth came in at 20.4%. By contrast, the US fell 9.5% while the eurozone fell 12.1%.

GAM’s managed fund solutions investment director Charles Hepworth says there is a high correlation between a country’s success or failure in dealing with Covid-19 and stock market performance.

“The UK response to Covid arguably could not be described as a huge success and this translates into the record drop in GDP announced [last week] showing a 20.4% drop in output,” Hepworth says. “On the back of this, we haven’t been adding to UK risk asset exposure either before the crisis broke out or during it.”

Brexit leads fund pickers to look to international markets

But Gam’s MFS range had already been “allowing UK exposure to become naturally less of a driver on overall portfolio returns”, he says. The Balanced strategy is “significantly” underweight on the UK with an allocation of 8%.

“We have maintained a fairly fluid allocation to UK equities on the back of the election result last year for Boris Johnson,” he says. “Initial optimism that a stronger government majority would be a good thing for UK risk assets gave way to concerns that a harder Brexit stance would be more damaging to the UK economy.”

Brexit concerns were raised by several wealth managers Portfolio Adviser spoke to that were also underweight in the UK.

EQ Investors reduced its UK exposure in February and is continuing to do so, says investment manager Andrew Rees. “The UK will leave the EU after the end of the transition period and its short- and medium-term prospects are unknown. Given this we continue to have higher conviction in other regions.”

EQ favours Liontrust Special Situations for UK exposure due to its focus on quality companies and its experienced managers.

Tatton Investment Management briefly moved to neutral after the Conservatives won a convincing majority in the 2019 election but has since returned to underweight, the allocation it had maintained for most of the post-Brexit referendum period. Its exposure comes via the Invesco Perpetual UK Enhanced Index, Axa Framlington Mid Cap and Schroder Recovery funds.

“What has held back global investor appetite for UK stocks is that beyond the Covid uncertainties the UK is additionally faced with Brexit uncertainties which have and will lead to restrained business investment and the potential for economic disruptions,” says chief investment officer Lothan Mentel (pictured). “Only once these additional uncertainty factors start to lift can we also expect the UK underperformance cloud to lift as the low UK equity valuation levels will then make UK assets look more attractive than other regions.”

In February, the DFM introduced a tactical overweight to emerging markets, specifically China, and more recently has moved overweight on Europe ex-UK.

Some spot tactical opportunities in oversold UK equities

But not everyone is treating the UK with the same level of caution.

Architas investment manager Nathan Sweeney reckons Brexit is mostly priced into UK equities given they have not recovered from Covid-19 lows to the same degree as international markets.

Architas introduced the iShare MSCI UK Small Cap ETF this month as a tactical play. “The [GDP] numbers are bad, but to be honest, the bigger the fall the bigger the bounce,” says Sweeney, who is confident a Covid-19 vaccine will be found by the end of 2020 or early next year.

The iShares ETF is a tactical play but Architas also has exposure to the UK through Lindsell Train UK Equity, JOHCM UK Dynamic and Artemis Income.

Seneca Investment Managers fund manager Mark Wright says he doesn’t put too much faith in quarterly GDP figures and questions the reliability of the data. Instead, Wright likes to focus on valuations rather than economic data for the multi-asset funds he manages.

“The UK equity market has been a great hunting ground for new ideas during the pandemic and some of the valuations we witnessed in existing holdings were frankly ludicrously cheap,” he says.

The multi-asset manager has added to “high quality” stocks like AI marketing business Dotdigital and kettle safety business Strix Group during the coronavirus crisis. M&G and Diversified Gas & Oil have also been added to portfolios and are delivering double digit dividend yields, he says.

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