A tumbling pound and a renaissance for the fossil fuel industry will not be enough to reverse a long-term trend and draw investors back to the UK stock market, according to a leading British fund manager.
Richard Buxton, an investment manager in UK equities at London-based Jupiter, said in an interview: “What could bring people back to major investing in the UK? I can’t hand on heart provide a heap of compelling answers.”
Investors have pulled £6.6bn from UK equities strategies this year, making 2022 already the biggest year of outflows in a decade, according to data from the Investment Association, a trade body. This outstrips the £4.8bn withdrawn in 2016, the year of the Brexit referendum. UK-focused funds have recorded net outflows every year since then.
Meanwhile UK government bonds and the pound have dropped on estimates that inflation could reach 20 per cent next year if energy prices remain high, and investors and analysts expect them to weaken further as the country issues billions of pounds in debt to fund prime minister Liz Truss’s £150bn energy package.
Buxton pointed to several long-term structural trends that have also turned investors off UK equities.
“The multiyear trend of let’s go global — which is a sneaky way of getting lots of US exposure, because the US has been so all-powerful — you don’t reverse that overnight,” he said.
He also highlighted the UK market’s bias towards cheap “value” stocks in sectors such as mining and energy, and the absence of fast-growing technology companies.
Until the Federal Reserve’s change of direction in November, growth stocks had been on the up for more than a decade, a prime beneficiary of central bank action to shore up the world economy against the financial crisis in 2008 and then the pandemic.
“The perception is that we’re a dull, boring stock market with no exciting go-go growth companies on ludicrous valuations,” said Buxton.
But this could stand UK investors in good stead in the current environment, he added, given that sectors like oil and mining tend to fare better than high growth stocks during periods of inflation.
An investment company managed by fund manager Ruffer said on Friday that its position in oil major BP, which rose 10 per cent during August, helped its equity exposure to outperform the wider indices that month.
“I actually think oil and mining is a wonderful place to hide in a commodities bull market and an equities bear market,” said Buxton. “It will take a three-year bear market crushing the Nasdaq before people say the trend of going global maybe wasn’t such a good idea.”
The FTSE 100 is one of the best-performing national stock indices this year, down just 2 per cent, while the S&P 500 in the US is down 15 per cent. The bulk of companies in the FTSE 100 earn revenues in dollars and other currencies that have gained against sterling, helping their bottom lines.