Britain is in the bargain basement

published 28 December 2018

928-London-634 — City gloom is starting to look overdone

Our stockmarket has been an international pariah this year and the exodus is gathering pace, says Daniel Grote on Citywire. The latest monthly Bank of America Merrill Lynch survey of global fund managers revealed their allocation to UK stocks had fallen to a near-record low. British investors are just as negative.

An index of UK investor confidence by Hargreaves Lansdown suggests their mood is worse than during the financial crisis. According to the Investment Association, £10bn has been yanked out of UK equity funds since the referendum in 2016, while £12.8bn has been located to bond funds in the same time frame. "That's a risk-off trade if there ever was one," says Investor Chronicle's Mark Robinson. But the gloom is starting to look overdone. Brexit is the key near-term problem, but the shape of our future relationship with the EU will be much clearer by the spring, so investors put off by the uncertainty should then be inclined to take another look at the UK market, as Alex Wright of the Fidelity Special Values Trust notes in the Investors Chronicle.

Meanwhile, a harmful no-deal Brexit is still not widely thought likely, but in any case, valuations have reached the point where plenty of bad news is already in the price. The FTSE 100 offers a forward dividend yield of 4.9%, says Hamish McRae in the Evening Standard. The yield has very rarely been above 4% in the past 30 years. And the fundamentals are solid, with the labour market bolstering wages, which bodes well for consumption, and UK corporate profits (the mid-caps and blue-chips combined) reaching an all-time high in the year to November, according to the Share Centre. The upshot? Next year could well be a much better one for UK shares than 2018.