Britain is now uninvestable – which probably makes now a good time to buy
The world’s investors are shunning the UK, says John Stepek. But when an asset class is as detested as UK stocks, that’s when you should look at buying.
Nobody likes Britain right now.
Global fund managers are shunning the UK. Apparently it's "uninvestable".
I don't know about you, but I've always been a sucker for an underdog.
I took a look at what might happen next with Brexit in the latest issue of MoneyWeek magazine, out now. The story keeps moving as political stories do but as I write, the potential scenarios outlined there are still relevant. So subscribe to the magazine now if you haven't already buy yourself an early Christmas present, you know you deserve it.
Park your feelings about Brexit and look at British assets
Anyway as far as the deal on the table goes, I realise that some of you think it's a hideous betrayal. I realise that others of you wish the whole thing had never happened in the first place. And I also realise that a significant proportion of you are basically now fed up with the whole business.
But park your feelings about Brexit for the moment, because I'm not going to bother running through the deal itself today.
What's really interesting to us as investors is how this has affected sentiment towards the UK stockmarket.
Britain is an international pariah. We're not getting invited to any Christmas parties. We're like Louis Winthorpe III in Trading Places after his fall from grace. Former friends are now embarrassed by our presence.
Of course, when an asset class is detested, that's when you should start getting interested in it. So when I'm reading in the FT that investors have pulled a full $1trn out of UK equity funds since the Brexit vote in June 2016, and that UK markets have lagged the rest of the world as a result, I have to say that my ears prick up.
When I'm seeing analysts quoted as saying that "the UK equity market is close to uninvestable", or that "the consensus among investors is that the UK is uninvestable at this point because it is not amenable to rational economic analysis" I have to sit up and pay attention.
People know nothing about their own politics let alone anyone else's
One thing that various political ups and downs over the past few years has brought home to me is that politics even at a national level is spectacularly local in its nature. Within countries, certain groups of individuals can't understand why people voted differently to them. So what hope do outsiders have of grasping the nuances involved?
I've spoken to hardcore "small government" American libertarians who can't understand why Britain voted to leave the EU. "Don't you guys want free trade?" You then try to explain to them why anyone who is pro-small government might struggle philosophically with the EU if they actually knew anything about it, and you see their eyes glaze over. They know nothing, but they're convinced they know everything.
And think of all the panic around Greece. There were so many black and white analyses, so many flowcharts, so much drama. And ultimately it was much more complicated than anyone could wrap their heads around from a trading desk in London or New York.
Politics is messy and complicated. Even ostensibly independent analysts can't put aside their own biases when calculating what might happen next. And there are too many variables. That provides fertile ground for misunderstandings and mis-pricings, which are of course, what contrarian investors want to see.
Here's the reality if you are a global fund manager, you are looking for excuses not to worry about certain geographies. The UK is a small part of the global investment universe. Apple's next earnings announcement is almost certainly far more critical to the performance of the average bandwagon-trailing global fund than anything that happens to the FTSE 100.
So it's far easier to just park the UK in the "too hard" bin. That's not conducive to market efficiency. If you decide that you're not going to buy BP for the same reason that you're not going to buy Lloyds or Marks & Spencer, then you can't argue that this is deep analysis.
It's entirely understandable of course. If you, as a global fund manager, invest in Britain, and it all looks as though it's going pear-shaped, then all the other global fund managers most of whom almost certainly think Brexit is a ghastly idea are going to do the intellectual equivalent of picking on you in the changing rooms. As will your clients.
So ducking out of the UK is sensible from a career risk point of view. You, on the other hand, are probably not a global fund manager. Nobody is going to judge you on your portfolio choices (except for yourself, which is hard enough).
We might get a no-deal Brexit. That would result in short-term panic, definitely, and both sterling and UK stocks would probably fall. But eventually they'd bounce, because the entire country would not fall off the edge of the world. So if you can cope with hanging on for the long run, you're OK.
We might get a Jeremy Corbyn government. That's more of a wildcard. Capital controls? Maybe. Higher taxes? Very likely. Does that mean that every single company in the UK is "uninvestable"? Much as I dislike Corbyn and pretty much everything he stands for, I struggle to believe that a Corbyn government alone could destroy that much value.
So there are risks. That's investing for you, folks. But on balance, if you're revisiting your asset allocation any time in the near future, then I reckon you should take a close look at how much you already have in UK and sterling assets. If you're not already heavily home-biased (as many investors are) then I'd consider upping your exposure to the UK.