Are Investors Seeking Greener Pastures Outside the UK?
Investment levels during August 2017 remained bullish, despite changing preferences among investors. According to the Investment Association, investors are diverting capital away from the UK economy and markets, in favour of overseas bourses. The net volume of retail sales of investment funds in the United Kingdom amounted to £3.6 billion, accounting for the highest figures ever for August in the UK. Now, the total funds under management are approaching £1.2 trillion as seen by the above graphic.
The biggest magnet for investors remains stock market funds, and these continue to attract high levels of investment across the board at £1.1 billion. With Brexit pressures mounting, there is a move towards foreign markets as the uncertainty related to the impact of disinvestment in the UK grows. The markets attracting the largest capital flows include Germany, France, Spain, Italy et al. Europe ex UK saw net sales of £507 million and Global Equity saw net sales of £347 million.
In the United Kingdom, the picture is somewhat bleak, with a net outflow in retail sales of £1.4 billion since January 1, 2017. We are still seeing high levels of interest in UK bonds, despite the prospect of rising interest rates in the UK. Recall that the inflation rate was last reported at 2.9%, and real wages were increasing at a rate of just 2.1%. This has prompted calls for the Bank of England and the Monetary Policy Committee to consider hiking the bank rate from its historic low of 0.50% by at least 25-basis points. Typically, a rate hike does not bode well for bonds. The flexible bond sector attracted capital worth £333 million, and there was equal interest among investors in global bonds and corporate bonds.
Generally, it appears that the perspective on the global economy is positive, despite tensions between North Korea and the United States. This is the first time since the global financial crisis of 2008 that investor sentiment is decidedly bullish and this reflects in the optimism for global economic prospects. Investor confidence remains ebullient despite the bellicose rhetoric between North Korea and its neighbors. However, one of the bugbears in the equation is rising inflation vis-à-vis the CPI in the UK and falling real wages. While the fourth round of negotiations between the UK and the EU went relatively well, the impact may be nothing more than a pyrrhic victory.
UK Investors Seeking Safe-Haven Portfolios Abroad
UK investors are not looking to lock all of their capital into the UK market, and are seeking a diversified portfolio in the form of overseas investments. This has positive effects for certain sectors and categories of the UK markets, which are now not overvalued, but display strong value propositions. The FTSE 250 index mirrors the performance of the UK economy well, while the FTSE 100 index tracks in tandem with the GBP in an opposite direction.
As the GBP strengthens relative to foreign currencies, so the value of stocks on the FTSE 100 index declines. The rather nebulous Brexit process and concomitant agreements have not yet provided any clear framework within which Britain will extricate itself from the EU. Issues of the ECJ authority over European citizens in the UK, payments made from the UK to the EU and pensions, and the nature of economic and political relationships between the UK and the EU remains in doubt.
Across the English Channel, the European economy has finally turned the page. Improvements in manufacturing are widespread, notably in Germany which is leading the charge. There is less of a discount available on valuations in the EU economy, relative to the UK and the US, and growth prospects are robust. From a UK investment perspective, it is likely that more exposure to the EU market is likely to come as the tide is shifting in favour of EU investments.
As a UK investor, are you planning to diversify your portfolio to include more European stocks, bonds and assets? Do you feel that Brexit negotiations will bode well for the UK financial services sector and equities markets?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.