Investors have – so far – been unfazed by a bruising general election campaign and the continuing unknowns of Brexit, with statistics showing brisk demand for equity investment in the UK.
Recent figures from the Investment Association show fund sales hitting a record high of £4.9bn in April, while equity kept its position from March as the best-selling asset class in the UK.
Stocks and shares are conventionally seen as higher risk in times of uncertainty. Yet inflows to equity funds in April were the second highest on record, at more than £2bn, beaten only by inflows of £2.5bn in the same month four year ago.
The equity boom has coincided with the FTSE 100 reaching new highs, as internationally-exposed companies which make up much of the index have benefitted from the pound’s post-Brexit weakness. Charles Cade, head of investment companies research at Numis Securities, said the recent surge in demand for equity funds suggested that investor caution at the start of the year had given way to “concern over missing out on further market gains”, pointing to the FTSE 100’s gain of 7.8 per cent so far this year (on a total return basis).
Sales were further powered by superstar fund manager Neil Woodford, who drew £553m into his new Income Focus Fund in one of the industry’s biggest ever fund launches in March. This alone helped catapult the Specialist category to the top of the fund charts in April, which saw overall sales of £678m.
But the statistics belie some trepidation among investors. As the government now heads into Brexit negotiations with the EU, investors have continued to pull money from equity funds focused on the UK and Europe. Both regions have seen monthly average outflows of around £300m in the past year, with investors preferring more general global equity funds to mitigate their risks.
Alex Scott, deputy chief investment officer at Seven Investment Management, recently revealed that the firm is holding up to 12 per cent in cash in some of its more cautious funds as it heeds “amber warning signs” over the UK’s faltering economy. “UK shares have continued to make progress – helped of course by their high exposure to overseas assets. Without a repeat of last year’s boost to foreign profits from the fall in sterling and with uncertainty ahead for domestic profits, we are worried that UK equity valuations don’t fully price in the risks.”
Laith Khalaf, senior analyst at the stockbroker Hargreaves Lansdown, argued that whatever happens to the FTSE 100 following the election, the case for long term money being invested in the stock market is undiminished. “The FTSE may be at a record high, but if you factor in the level of companies’ earnings, the UK stock market is nowhere near as expensive as it was at the turn of the millennium, when the FTSE almost touched (on) 7,000.
“That’s reinforced when you look across at the returns on offer from bonds and cash. It’s also worth bearing in mind that while today the FTSE 100 is still less than 10 per cent above its 1999 peak, the index doesn’t take account of dividends, which are a key driver of returns for stock market investors.”
Guy Stephens, director at financial advice firm Rowan Dartington, said it was a “given” that markets were overvalued, but that it would take an event of “significant scale” to scare people into running to cash. “Whilst global GDP is rising, regardless of Trump’s policies, Brexit, European elections or terrorism, this looks unlikely as earnings are robust, profits are respectable and dividends are secure.”
Appetite for equity investment will also depend on whether the base rate stays at a record low of 0.25 per cent, which has slashed the interest offered on savings accounts. Guy Foster, head of research at investment managers Brewin Dolphin, said a weak pound would push up inflation up further as the cost of importing goods escalates.
“Ordinarily that might push the Bank of England to raise interest rates in a bid to bring inflation back down, but the Bank will be reluctant to do this because households are so heavily indebted with mortgages and other unsecured debts, that any increase in interest rates could very painful and may have far-reaching consequences, with some people unable to service more expensive debt repayments.”
Tom Stevenson of investment firm Fidelity International said the pound would continue to be “a lightning rod” for uncertainty but that predicting where it will go is a “fool’s errand”.
He said: “If the last year has taught us anything it is the wisdom of humility and prudence in your investment approach. A well-diversified portfolio has delivered fantastic returns over the past 12 months and diversification, geographic and by sector and asset class, remains the likeliest driver of acceptable returns in the 12 months to come.”
Alan Steel, chairman of Alan Steel Asset Management in West Lothian, said investors needed to “look away for a few years” rather than obsess over market movements. “Ignore the headline gossips and pick individual managers with outstanding track records. Then let them get on with it.”
Patrick Connolly of independent advisers Chase deVere agreed that investors needed both diversification and a “buy-and-hold” mentality, suggesting multi asset funds or a combination of more specialist individual funds to spread the risks during uncertain times. “For an individual investing £50,000, a good asset blend might be 50 per cent equities, 20 per cent fixed interest, 20 per cent absolute return funds and 10 per cent commercial property.”
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