Is this the catalyst for a bounce back in UK shares?

Professional investors from around the world increased their allocation to British shares in September and are now, for the first time since July 2021, overweight the London market.

This is according to Bank of America’s monthly Fund Manager Survey, which canvasses the asset allocation views of large investors with a total of £450 billion in assets.

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It found that allocation to UK equities jumped from the start of August to the start of September, to a net 2% overweight positioning.

The FTSE All Share index, made up of around 600 of the largest listed companies in the UK, has risen 10% this year (including dividend reinvestment).

But despite strong performance and cheap shares relative to their earnings, the trend has generally been for investors to withdraw money from UK assets.

The Investment Association (IA), a trade body for the funds industry in the UK, has shown that funds investing in UK shares this year have seen considerable outflows. Its data shows that in every quarter of the past two years the UK All Companies sector has been the worst-selling region by net flows. 

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This sits in contrast to interest in UK shares from private equity funds, which have been taking advantage of cheap UK shares to take control of British companies. There were 30 takeover offers for London-listed companies in the first half of the year, according to stockbroker Peel Hunt.

Contrarian opportunity

Bank of America said that buying commodity-related businesses, such as oil or mining firms, could appeal to contrarian investors.

It found that commodity allocation had slumped to the lowest level since June 2017, driven by falling commodity prices linked to fears that the global economy would keep slowing down.

Other contrarian trades include buying Chinese stocks, technology shares, real estate investment trusts and healthcare stocks, according to Bank of America.

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Sentiment was generally positive, however, with investors anticipating a 25 or 50 basis point interest rate cut from the US Federal Reserve this week.

Bank of America described investors as “nervous bulls” owing to their waning cash levels.

This is an improvement on August, when investors rotated money out of the stock market and into defensive assets, such as bonds, cash and healthcare companies.

Cash levels rose from 4.1% to 4.3% last month and the overweight positioning in shares dropped from 51% to 31% last month due to volatility in markets.

Cash levels are now at 4.2%, with a drop in the cash allocation indicating a more positive outlook for asset prices.