Interactive Investor

Optimism towards UK improves, but pros are not piling in

The out-of-favour UK market is showing signs of recovery, but international investors are still shunning it.

15th May 2024 11:07

by Sam Benstead from interactive investor

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Professional investors became marginally more positive on the UK compared with April, but still have a significant underweight to domestic assets. 

Bank of America’s monthly fund manager survey found that allocations to UK shares rose slightly to hit their smallest underweight positions since March 2023. Investors have been consistently underweight UK shares since July 2021, according to the survey. The pros are now 14% underweight UK shares.  

This comes as UK equities register a strong six months of gains, with the FTSE All-Share index rising 16%, including dividends. In addition, the FTSE 100 index hit a record high last week, surpassing 8,300 points.  

Takeover activity is also picking up, which shows that companies are taking advantage of undervalued UK shares, with Anglo American rejecting a bid from BHP last week.  

Jupiter Asset Management UK equity income investors Adrian Gosden and Chris Morrison say that the UK market has rarely been cheaper, with low share prices contributing to higher dividend yields.  

They say BP is the cheapest it has been versus its own history, as is Barclays, and that the FTSE 250 taken as a whole has never been cheaper.   

Companies have been stepping up and buying back their own shares in an attempt to increase their appeal. Richard Hunter, head of markets at interactive investor, explains: “Companies repurchase their own stock, which means there are fewer shares in circulation. This should immediately improve the earnings per share (EPS) number as earnings are divided by fewer shares. 

“All things being equal, this should also lower the price/earnings (PE) ratio, which is a key metric for potential investors. The stock therefore becomes ‘cheaper’ and is likely to lure more investors.” 

Buybacks in the FTSE 100, Morrison says, were running at around £10-£20 billion a year, but then jumped to £60 billion in 2022, were around £50 billion last year, and are forecast to be higher this year. At £50 billion in buybacks, that is 2.5% of the FTSE 100 market cap.   

The survey showed that investor optimism improved across the board, with Bank of America finding that fund managers are their most bullish since November 2021, driven by expectations for interest rate cuts.  

Cash levels fell to a three-year low of 4%, with stock market allocations reaching their highest level since January 2022.  

Bank of America says that sentiment is not at "close-eyes-and-sell" levels, but riskier assets are vulnerable if more evidence of stagflation (inflation up, growth down) appears.  

The most-crowded trade was still the Magnificent Seven group of leading American technology shares, while Japanese shares were also popular.  

Investors are the most overweight healthcare and tech, and the most underweight utilities and consumer discretionary stocks.  

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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