Everyone's talking about... The UK
Professional Adviser Author: Laura Miller
In the fifth part of our new series looking at the most topical investment themes for the
quarter ahead, Professional Adviser asks multi-managers: with an election looming and
record low inflation, how attractive are home grown investments?
UK investors like to invest in the UK, the home bias. But the country offers a very mixed picture
at the start of 2015.
Inflation has just halved to 0.5% - the lowest ever recorded. The drop, largely linked to lower oil
prices, means wages will go further which should stimulate the economy.
It would be aggressive to go overweight now - we're mainly neutral but there will be a time to go
overweight.
But depressed oil prices will hit UK indices - both the FTSE All Share and the FTSE 100 are
heavily exposed to energy companies.
Not forgetting the uncertainty caused by of a looming General Election looks set to impact on an
already weaker (against the dollar) sterling.
Multi-managers - who look across the whole investment universe - give their view on whether
now is the time to dive in, or duck out, of domestic investments.
Architas chief investment officer and multi- manager Caspar
Rock
There is the weakness of export markets in China and Europe, the oil price [falls], the general
election - all three are having an impact on sentiment.
The UK's biggest export market is Europe. Though there is a body of opinion that thinks that the
EU GDP forecasts are a bit cautious, it's still pretty darn gloomy.
Sterling is also weaker against the dollar. All this has a huge effect on the equity market but a
positive effect on the gilt market, which is going up because inflation expectations are coming
down.
People are worried about the election. Labour has said they would have a go at banks, insurers,
energy companies - these are all FTSE 100 businesses. Labour winning would have a negative
effect on the equity markets.
The question is, is that already priced in? I think its gone a long way, but if there is an election
result the markets don't want there will be a sell off.
If interest rates are more than 1% this year I would be surprised.
Fidelity Worldwide Investment multi-asset portfolio manager
Nick Peters
We have been cautious on the UK market due to the General Election risk but I am inclined to
reduce my underweight position coming into the election as there are other tailwinds like a lower
oil price.
It would be aggressive to go overweight now - we're mainly neutral but there will be a time to go
overweight.
Schroders multi-manager Robin McDonald
The UK is probably going to grow solidly this year but not spectacularly. The UK economy is on
the US coat-tails, and there is a good bounce out of the [UK] housing market and a lower oil price.
Structurally growth this cycle is much slower than last cycle, so we can't get too optimistic on
growth.
But there are a lot of big dollar earners in the UK stock market. The pound is weaker against the
dollar - if you're a company who reports earnings in pounds but make your money in US dollars
then that is good for you.
This will probably be a year that favours large caps over small caps because small caps tend to
rely more on the domestic situation.
We have tried to get out of sterling for a while - a lot of our cash in in the US dollar. Sterling has
already fallen 3.5% this year against the dollar - I think the sterling will trade weaker in the run up
to the election.
JP Morgan Fusion multi-manager Nicholas Roberts
If we have another year of risk on it is quite likely that the FTSE will underperform - it is a
defensive index.
We see value in the UK; there are good dividends, the pound falling against the dollar is a good
thing. When we speak to [companies'] management they say underlying performance is good.
City Financial multi- managers Peter Toogood and Anthony
McDonald
We've been underweight the UK and we are not looking to change that.
F&C multi-managers Gary Potter, Rob Burdett, Anthony
Willis, Scott Spencer
You could see sterling and gilts under pressure around the General Election.
The looming election is deterring investment in the UK. Companies are investing outside the
country. You really have to pick the stocks and not the market.
Henderson multi-manager James de Bunsen
We're underweight the UK. The headwinds are a big exposure to energy and resources. Valuations
are starting to look attractive but it is hard to know when the oil price will recover. The FTSE has
a much higher exposure to energy than other indices.
Also the General Election is massively uncertain. Domestic companies will probably tread water
until then.
A lot of domestic companies in the small and mid cap sector have very high valuations. This is
important because with the end of QE in the States - which is a much bigger event than the ECB
starting QE - there will be less liquidity and people will start realising that these [small and mid
cap] stocks will have less liquidity.
UK banks also still have a fair amount of regulatory headwinds.
We see better opportunities elsewhere, where the falling oil price is better than it is for the UK,
like Asia and emerging markets.
Legal & General multi-asset fund manager Justin Onuekwusi
UK growth should be reasonably attractive compared to the eurozone and Japan.
But the UK market is not very domestically orientated - 80% earnings on the All Share are
overseas. They also have a large allocation to the energy sector.
From a valuation perspective though, the UK doesn't look that unattractive. I expect volatility in
sterling due to the General Election. Short term I would be cautious on the UK.