The investment industry and markets are often full of divided opinion and contradictory thought – but nowhere is this more apparent than when matching the UK and global economic forecasts with investor sentiment.
The UK market can be a gateway to global corporate growth, given the international focus of many large-cap stocks. Yet despite an upswing in earnings upgrades around the world, UK equities are not faring as well as others.
Much of this could be put down to the UK’s own economic outlook, but even this has been muddled by contradictory soft and hard data. Strong manufacturing and export figures have not been matched by robust GDP growth. Inflation remains strong, driven by sterling, and the central bank consistently warns the market it has underestimated its policy-tightening cycle.
As a result, UK equity fund flows have struggled severely in 2017, with net redemptions of £1.3bn from the IA UK All Companies sector by the end of July. The picture is worse over 12 months, with net outflows reaching £3.6bn. Equities in general have recovered from a difficult 2016 to pull in £5.2bn this year.
So why are investors so pessimistic? The FTSE All-Share index has risen 6.6 per cent year to date, and the FTSE 100 is up 5.6 per cent. Mid-cap stocks have resumed their position as outperformers, rising 11 per cent.
Active managers have also held their own. The average fund in the UK All Companies sector has returned 8.5 per cent, with 65 per cent of funds in the peer group currently beating the FTSE All-Share.
Individual funds have performed well, with year-to-date returns reaching as high as 27 per cent in the case of the Old Mutual UK Dynamic Equity fund, managed by Luke Kerr. Only three vehicles have lost investors capital.
Sentiment could be being driven by macro and currency factors. The FTSE 100 has developed a strong inverse correlation with sterling, and the currency has had a mixed period, weakening against the euro but rising against the dollar. Following last month’s Bank of England meeting – which pointed to the increased possibility of a November rate rise – the pound rose against both.
In terms of the UK’s own economic outlook, core inflation is above target, with previous sterling weakness beginning to feed through. Business confidence is mixed and quarterly GDP figures have reached just 0.2 and 0.3 per cent respectively for the first two quarters of 2017, compared with an annual growth rate of 1.9 per cent in 2016.
The outlook among many asset allocators is one of pessimism. John Stopford, head of multi-asset at Investec, says: “Evidence has emerged of more significant concerns for an economy still reliant on consumer credit and housing.
“We remain more cautious on the prospects for UK equities where returns continue to be driven by conflicting factors. The market remains underpinned by easy monetary policy and sterling weakness, both of which are less supportive given a more hawkish central bank and a stronger pound.”
