As you can see on the twin charts below, asset managers’ return expectations from European and UK equities were the same in November 2014. In all 16 months since then, however, their outlook for European stocks has been brighter than its equivalent for UK equities.
Since December 2014, a large majority have consistently expected European equities to generate a return of more than 5% in the next 12 months. The two significant market corrections the asset class has experienced since then failed to materially affect their optimism.
UK equities take the hit
How different that is for UK equities. Commodity stocks are of course well-represented at the FTSE 100 index, making the asset class more vulnerable to the commodity price slump and to cyclical downturns in general. However, it is striking that return expectations for UK equities tend to be affected immediately when a market slump occurs. This happened twice last year: both in August and in December last year.
Overall one-year return expectations for the asset class are now even negative, for the first time since September 2008, as another macro risk has appeared on the scene: Brexit. Since February, when London mayor Boris Johnson expressed support for Brexit and sterling entered freefall (the euro/sterling exchange rate is now back at November 2014 levels), significantly more asset managers expect the FTSE 100 index to drop by more than 5%. In local currency, mind you.
Morningstar’s fund flows data suggest European fund buyers think along the same lines as asset managers. They have added €57bn to their European equity holdings since October 2014, while at the same time reducing their UK equity investments by some €7bn. Their strong bet has only marginally paid off, however. While the FTSE 100 is now down 1% since 1 October 2014, the MSCI Europe is only up by 0.4%.