Report shows world’s most influential portfolio managers are loading up on undervalued UK assets.
Exiled UK assets are back in favour on the global stage after an influential survey of fund managers found allocation to London-listed stocks the highest since 2014.
The leaning of the FTSE 100 index towards banks and energy companies has held back the UK's appeal in recent years, but with inflation fears mounting there's renewed interest in those sectors that tend to do better at a time of rising interest rates.
The monthly Bank of America survey of 216 panellists, with $625 billion (£440 billion) of assets under management, found that a net 2% of respondents were overweight on UK equities, the highest since March 2014, after a four-percentage point increase in allocations in May.
In contrast, investors reduced their overweight positions on technology stocks to a three-year low, as questions are increasingly asked about whether higher interest rates will diminish the lofty valuations of companies priced for their future strong cash flows.
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Global markets last week endured their second burst of inflation-led volatility this year, with the FTSE 100 index falling to 6,834 on Thursday before recovering to about 7,050 today.
US policymakers have attempted to calm jitters by insisting that recent inflationary pressures are transitory and not unexpected when set against last year's pandemic base line. Their priority continues to be on getting people back into work after Covid-19.
But as the title of Bank of America May's survey neatly describes, investors are increasingly worried about the “Elephant in the Boom”.
At 35%, inflation is seen by fund managers as the biggest tail risk in the survey, much larger than the 9% for Covid-19. A repeat of 2013's taper tantrum, when markets panicked over quantitative easing being unwound, is the next biggest fear at 27%, ahead of the forming of an asset bubble at 15%.
Overall, however, the survey finds that investor sentiment is still bullish, with 69% expecting both above-trend growth and inflation. Cash levels are low and steady at 4.1%.
But the survey highlights a hint of defensive positioning, with sector weightings in late cycle banks and resources now exceeding 2006 highs, while there has also been “furious” short-covering in consumer staples.
Value remains the most popular investment factor, but in the past month there has been a surge towards “high-quality” and high-dividend stocks, with small-caps continuing to fade.
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The most crowded trade is long bitcoin, with 75% of survey respondents now believing the cryptocurrency is in bubble territory. The asset class that most investors think will outperform continues to be the S&P 500, but at 29% this view has weakened over the past month.
Oil has risen to second place after a big jump to 25%, while emerging markets have also surged in popularity to 20%.
The move towards UK assets comes with the FTSE 100 index still a long way short of its record high of 7,877, even as Wall Street trades at all-time highs. Until recently, Brexit uncertainty had been a significant factor limiting UK exposure for international investors.
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