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Big investors are positioning themselves for “a turning of the tide” for London’s unloved stock market, hoping that an improving economy, lower interest rates and political stability will finally boost cheap British shares.
International asset managers including BlackRock and Allianz have joined UK fund houses such as Ruffer and Rathbones in raising their exposure to UK-listed stocks in recent months.
After years of disappointing performance compared with European and US markets, investors now see UK valuations as attractive. According to flow data from Bank of America, its institutional customers have since May switched from being net sellers of UK equities to net buyers — reversing a long-standing industry trend.
Figures from Morningstar show three consecutive months of inflows into mid-sized UK stocks — a sector closely tied to the fortunes of the UK economy — the first inflows since November 2022.
“The narrative surrounding the UK has experienced a notable shift,” said Rebecca Maclean, an investment director at Abrdn.
She pointed to falling inflation and optimism that Labour’s landslide victory in this month’s general election would lead to a period of stable government. “Early indications suggest a turning of the tide for UK equity flows,” she added.
The shift in sentiment comes after a bruising eight years for UK shares since the 2016 EU referendum. Institutional and retail investors have largely shied away since then and a steady exodus of companies from the London Stock Exchange has fuelled angst about the future of the City.
Bargain-hunting investors drawn by those cheap valuations have largely been disappointed. The FTSE 100 index has returned 30 per cent over the past five years, compared with 45 per cent for the continent-wide Stoxx Europe 600 and 94 per cent for Wall Street’s S&P 500.
But London’s stock market could be in the early stages of a revival. Vivendi, the French media conglomerate, announced plans this week to list its French TV business Canal+ on the LSE. Chinese fast fashion company Shein is also expected to follow later this year.
London-based Ruffer has doubled its exposure to UK stocks from 5 per cent to nearly 10 per cent of its portfolio over the past few months. “In the UK, valuations are attractive, there’s more political stability with a new government — it’s an interesting place to be,” said Ruffer fund manager Alexander Chartres.
BlackRock, the largest fund manager globally with $10.6tn under management, moved to an overweight position on UK stocks in early July.
“Although the UK equity valuation was clearly attractive, we lacked a catalyst to go overweight,” said Vivek Paul, UK chief investment strategist for the BlackRock Investment Institute. “The potential for a more stable political environment provides this.”
Paul contrasted the clear outcome of the UK vote with political turmoil in France, where the far left and far right made big gains in recent parliamentary elections.
James Thomson, manager of the £4bn Rathbone Global Opportunities fund, said he now had his largest holding of UK equities — 6 per cent — since 2016.
He said he favoured the UK because it was “no longer an outlier politically or economically with inflation back to target. Sterling is the strongest G10 currency this year and on the cusp of a following wind from a string of rate cuts.”
Some global equity portfolio managers had already decided that the UK was simply too cheap to ignore months before the election. Bermuda-based Alec Cutler began buying British stocks for his $5bn Orbis Global Balanced Fund 18 months ago, and now has 10 per cent of his money in the UK market.
“It feels like a value nirvana for an equity investor,” he said. He holds Rolls-Royce, one of the top-performing stocks on the FTSE 100, as well as smaller companies such as Keller, a construction group, which is up 67 per cent year to date.
The renewed interest from investors is yet to show up in a meaningful rally for the London market, partly because optimism around the UK has boosted sterling. A stronger currency acts as a drag on the profits of the multinational companies that dominate the FTSE 100.
Meanwhile, retail investors continue to sell out of UK equity funds, withdrawing nearly £1.8bn in May — a record monthly amount. Since 2016 about £54bn has been pulled out by individual investors, according to data from the Investment Association, a trade body.
Still, fund managers argue that the negativity that has surrounded the UK market leaves it primed for a period of catch-up with overseas markets, even if there is no full-blown renaissance.
“The [view of the] UK as the sick man of Europe has not been proven,” said Simon Gergel, UK chief investment officer at Allianz Global Investors.