With redemptions in every single month of the calendar year and total net retail outflows of £10.18bn, 2023 proved to be another brutal year for the IA UK All Companies sector.
Having been the least popular sector in every month last year, the beleaguered peer group took the unwanted honour of bottoming the sales rankings for two years in a row, with retail investors instead opting for the safety of funds in the IA Volatility Managed (the year’s best seller) and IA Short Term Money Market sectors.
In total UK equities saw £14bn pulled by investors in 2023, the eighth consecutive year of outflows, while Money Market funds closed out the year with £2.2bn invested overall.
So what have those investors who have turned their back on old blighty missed out on? According to FE Fundinfo, funds in the IA UK All Companies generated an average return of 7.4% in 2024, while the FTSE All-Share was up 7.9%. Over the same time period, the IA Short Term Money Market sector was up 4.2%. So should investors continue to sit on the sidelines or is it time to be looking at the UK again?
“The UK has been held back since the turn of the year by its lack of tech stocks and relatively high exposure to the defensive sectors and commodity-related equities, both of which have been underperforming,” said Chris Metcalfe, chief investment officer at Iboss.
“However, we retain our positive view,” he added. “The UK is looking ever cheaper relative to elsewhere, with its price/earnings ratio now close to 40% lower than the rest of the world.
“The domestic economic outlook is also looking rather better and small and mid-cap stocks are best placed to benefit.”
Reason for optimism
Despite the negative investor sentiment, which has beset the UK since the vote to leave the European Union in 2016, Metcalfe believes there are plenty of reasons for optimism going forward.
“The UK ranks fourth in the Global Innovation Index, just behind the US, but ahead of the likes of Singapore and Germany,” he said. “The UK also benefits from political stability, with two broadly centrist parties battling it out in the coming general election.
“As old-school globalisation continues to retreat, we expect new winners to emerge, and the UK, with its history of entrepreneurship, is potentially one of them.”
With this in mind, Metcalfe said Iboss remains bullish on the UK, as it has for some time, and within the IA UK All Companies sector its top fund pick is Artemis UK Select.
“UK equities show promise in 2024, trading at a 35% discount to global markets after ceasing underperformance,” he said. “The Artemis fund benefits from the recovery of UK SMIDs’ underperformance in 2023. It’s a versatile multi-cap fund, investing across all market caps and styles.
“Despite anticipated volatility due to geopolitical tensions, a general election, and global economic uncertainty, fund manager Ed Legget’s adept stockpicking strategy has shown resilience, notably outperforming in rising markets like 2023. With a stable management team, the fund’s flexible approach is poised to navigate the challenges of 2024 effectively.”
Bearing a resemblance to the aftermath of the 2008-09 financial crisis, Darius McDermott, managing director at Chelsea Financial Services, said in hindsight investors will view this period as an “ideal entry point” to capture significant long-term growth.
“UK equities have undeniably faced headwinds, with elevated inflation, rising interest rates and political uncertainty all playing a role,” McDermott said. “Meanwhile, the US and other global markets have attracted significant investor interest, leaving British stocks in the shade.
“However, the turbulence has offered up a number of compelling opportunities, with high-quality UK-listed businesses with attractive growth prospects now trading at historically low valuations.”
Economic tailwinds
McDermott added that numerous economic tailwinds are also coming into the fore to boost the appeal for UK equities.
“UK inflation has sunk to its lowest level since September 2021 which, coinciding with strong wage growth, has meant a boost in consumer confidence,” he said.
“This has been further buoyed by stabilising house prices and the prospect of falling energy prices in April, while encouraging GDP figures point towards a potential recession recovery on the horizon. Markets are also adapting to the idea of a centrist Labour government ahead of the upcoming election.”
Yoram Lustig, head of multi-asset solutions at T Rowe Price, remains on the fence when it comes to his UK equity positioning.
“While valuations are appealing versus history and major peers, our positioning in the UK market remains neutral, he said.
“Even though the slowing economy and more reasonable inflation levels have removed near-term tightening pressure, domestic factors – such as Brexit adjustments and average wage growth – are inflationary and may keep rates higher for a while longer,” he added.
