UK and European equities were among the five worst performing Investment Association sector in February. Between 01 February and 01 March, Europe including the UK produced the weakest returns (-2.72%), followed by Europe ex-UK (-2.56%) and UK All Companies (-2.52%).
The one saving grace for the UK was gilts, which offered a measly return of 0.58%, which still made them the fourth best performing IA sector.
Unsurprisingly, investors turned to bond sectors amid the turmoil but crucially global sell-offs during February revealed just how dubious investors remain about the UK and Europe.
“UK equity and European sectors took the brunt of the sell-off in February as investors sought the safety of the US dollar and Japanese yen,” explains Adrian Lowcock, investment director at Architas.
At the end of the month, as attentions once again turned toward Brexit negotiations, the pound recorded further losses against the euro, greenback and the yen.
In fact, of the 295 funds out of 2648 that produced a profitable return many “were only saved by sterling having a fairly lacklustre month,” says Ben Yearsley, director at Shore Financial Planning.
The weakness in the pound proved particularly toxic for UK-based investors who “saw the full impact of the market sell-off hit their UK and sterling quoted investments the hardest – as they offered no currency protection,” Lowcock adds.
Eclipsed by emerging markets
It’s understandable why UK equities on the whole remain out of favour with domestic and international investors, given the widespread uncertainty about Brexit.
The UK “has had a pretty grim time,” notes Richard Stammers, chief investment strategist at European Wealth, who said his underweight position in the region helped during the volatile moments of early February. “Our positioning meant that we saw less impact than in some markets.”
European equities, on the other hand, has also “lost its lustre somewhat recently” for some investors, including Tom Becket, CIO of Psigma Investment Management, going from a popular consensus trade this time last year to a less-enthusiastically loved asset class.
Becket himself has taken an about face on Europe, unwinding to a neutral position by the end of last year after being overweight the asset class for five-and-a-half years. And now he says he is contemplating bringing that exposure down to an underweight.
He says it is no surprise that investors are turning away from the UK and Europe, parts of the world which are not enjoying the same levels of growth and opportunity that can be found elsewhere.
“The US market in particular has benefited from increased optimism around corporate profits due to tax reform. Emerging markets have certainly benefited from a combination of decent economic growth, cheaper valuations, and I think it’s still an asset class where people are playing catch up with regards to allocations.”
To top it off, earnings from European companies have been less impressive than their US peers and places like Japan and a number of emerging markets, he adds. “European markets have really gone nowhere now for nearly a year.”
Money can be made in UK
Andrew Herberts, head of private client investment at Thomas Miller Investments, is still slightly overweight Europe on the basis that the UK and US markets have reached full levels of employment, while Europe still has room to grow.
“The UK and US are pretty much at full employment. In order for GDP to grow in the productive areas, we need to see companies investing in capital. They’ll do that, and they have been investing but it’s a bit harder. You don’t have this pool of labour you can just call on whereas in Europe you still do. I think Europe has got a bit further to go before you get scared about interest rate hikes. You can already see everyone nervous in the US about the interest rate cycle. It’s a similar story in the UK.”
Herberts also admits “we are probably a little bit more optimistic on the UK economic outlook for the next couple of years than the market”.
“UK plcs aren’t in the dire straits that politicians or the media would have us believe,” he says. “There is money to be made but it’s not going to be easy. There is a ‘wall of worry’ in certain areas. But people are still shopping on the high street and some retailers are making money. There are winners out there and if you identify them you can buy them very cheaply.”