The controversies arising from UK politicians over the past week or so are part of a long trail of embarrassments that have damaged the country’s attractiveness to investors, fund managers have said.
In one of the latest controversies, former prime minister Boris Johnson resigned as an MP after a report into his conduct found he had “deliberately misled” fellow MPs over the Partygate scandal.
Whilst the UK stock market displays many appealing qualities, disputes among politicians such as these have harmed its standing with global investors, according to Chris Metcalfe, investment director at IBOSS.
“The UK has a PR problem because whenever it announces anything – good or bad – it's invariably awful the way that message gets across,” he said.
“We’ve had multiple changes in prime minister that have come with their own changes in messaging and that hasn’t played out well on the world stage. It wasn't very becoming for the UK.”
Performance of UK equities vs international peers over 5yrs (in local currencies)
-11.png)
Source: FE Analytics
Metcalfe is positive on UK equities, but said it is an increasingly hard sell for investors not just globally, but domestically too.
“The fundamentals for the UK are much better than overseas investors appreciate and in a lot of cases, than UK investors appreciate,” he added.
“If you strip away that doom, gloom and misery from the messaging, we still like the UK and it has actually been performing well over the last year or so.”
Indeed, UK investors have pulled money from IA UK All Companies funds in every month since July 2021, totalling an outflow of £15.7bn.
The second biggest IA sector may not have seen a net inflow in 21 months, but Metcalfe said investors first started becoming disenfranchised with their domestic market well before then.
It started when the UK voted to leave the EU in 2016, which turned out to be a “shambolic” process that lowered investor’s faith in the government’s competence, he said.
This was also highlighted by Unicorn UK Smaller Companies manager Simon Moon as a turning point for sentiment towards the UK.
“The Brexit referendum marked the beginning of a tumultuous period of political division and uncertainty,” he said.
“The protracted lack of clarity surrounding Brexit also damaged the UK's reputation as a reliable and stable partner on the global stage.”
The rapid turnover of five prime ministers since then – the same number that served for the four decades prior to Brexit – did little to help the narrative, not to mention Liz Truss’ “disastrous” mini-budget last year.
Moon added: “A period of political stability would clearly be welcome and go some way to repairing the damage of the last few years.”
Given the UK’s similar size to emerging markets in global benchmarks, TAM Asset Management chief investment officer James Penny said it could be comparable to emerging markets at time over the past few years.
However he, along with the other experts asked, was positive on the investment opportunities in the UK. The common thread was that all felt disappointed that political uncertainty has diminished the UK’s financial reputation.
Penny said: “Whilst the UK economy and its currency might ostensibly appear like an emerging market on occasion, it remains a core developed nation with one of the oldest and most established stock markets in the world.
“Its government, whomever that is going to be in the coming years, will have a mandate to drive change and, importantly, drive innovation in a post-Brexit world.”
Although the UK has a poor image, the strong fundamentals of its stock market could be particularly attractive in a world of higher rates and stickier inflation – two things that Metcalfe thinks will linger for longer than the market expects.
“The expectation that rates would be lower for longer and inflation was going to be contained drove the market in 2021, but that’s of course melted away,” he said.
“People are now starting to look at balance sheets and profitability and I think that’s going to come to the fore in the UK.”
This is why he’s enthusiastic about funds such as Polar Capital UK Value Opportunities, which has a high weighting to these sorts of companies.
Although the £1bn fund is trailing the FTSE All Share benchmark or IA UK All Companies sector since launch, Metcalfe said managers Georgina Hamilton and George Godber have created a portfolio of resilient companies with strong balance sheets.
Total return of fund vs benchmark and sector since launch
Source: FE Analytics
Turbulence in Westminster may have had a toll on the UK stock market, but this has created some attractively undervalued opportunities for investors to leap on whilst prices are low, Metcalfe added.
“The UK has been absolutely hammered – there’s no other word for it – and it was an incredibly awful backdrop for UK stocks, but although things have recovered, I think there's a lot more to go,” he said.