Investors have been allocating away from the UK for the past few years, with industry studies showing that European investors are as underweight exposure to the UK as they have ever been; Ben Russon, portfolio manager UK equity at Franklin Templeton, tells Expert Investor.
The lack of information and challenges presented to investment teams having to model the potential outcome of a myriad of situations has left many wondering, ‘if you don’t have to have exposure to the UK, why take that risk?’
“It has been described to me as an asymmetric risk,” Russon says. “People have feared the downside of a hard Brexit; which, in turn, has outweighed the potential benefit of the upside of resolution.”
After four years of uncertainty hanging over the market, you can see that aversion to the UK playing out in asset allocation decisions and the relative valuations, he adds.
But, speaking shortly before prime minister Boris Johnson’s trip to Brussels in a last ditch effort to secure a deal, Russon is optimistic that a clearer sense of the lay of the land – whether that means a no deal, skinny deal or full deal – will reinvigorate interest in the UK market.
“If it’s a positive resolution, you can discount all those risks. And if it’s a disruptive, hard Brexit type situation then at least you can model it into your pricing.”
He adds: “We are at the point now where the big risk factor that stopped people getting involved in the UK market has the potential to be removed.
“That could see a renewed interest in the UK market and the market has scope for a re-rating to catch up with its global peers and could be positive for those participants who invest in UK equities.”
One of the benefits of the UK equity market, Russon says, is that it is very international in its composition, so investing in the UK market is not just investing in the UK economy.
“And if you can access that at cheaper valuations that you are paying for the international equivalent, that should be an attractive proposition.”
Russon doesn’t foresee any difficulties for European investors looking to allocate more towards the UK if a deal, or the right sort of deal, fails to materialise.
“I wouldn’t imagine that to be the case at all. The whole financial services industry hasn’t been a big part of the Brexit discussions but provisions have been put in place to smooth out that kind of transition.
“I think it is very unlikely to be immediately disrupted in that regard,” he says.