What’s the world’s most hated market? I hate to say it, but you probably live there
UK stocks are among the most hated in the world – almost nobody is buying. John Stepek explains why, and wonders if that presents an opportunity for contrarian investors.
I don’t think anyone would argue that the global news environment has been a calm one over the past few years.
This year has been the mere cherry atop the icing of a cake that was mixed during the 2007-2008 financial crisis, whacked in the oven amid the 2010 eurozone sovereign debt crisis, and emerged doughy in the middle and burnt on the top around 2016’s crisis of the governing classes.
But in the developed world at least, the UK has to be near the top, if not at the top, in terms of bleak news flow. I hate to break it you, but nobody loves us or even much likes us.
UK stocks are still one of the most hated asset classes in the world
The stand-out event driving the general downer on Britain is, of course, Brexit. As soon as the UK voted to leave the EU in 2016, the knives were out. The vast majority of broadsheet (I use the term to mean the non-tabloid media in general) outlets were not in favour, both within the UK and without.
We then had what amounted to a protracted battle over who was in government. That lasted pretty much from the minute David Cameron resigned to the moment Boris Johnson won the election in December 2019.
During those three-and-a-half years, Britain faced endless last-minute potential calamity. A cliff-edge Brexit that kept being pushed further and further into the future. A “will they, won’t they?” drive for a second referendum. The potential for a radically left-wing government to take power under Jeremy Corbyn.
Come December, with the election done, a government with a solid majority in charge, and the direction clear – exiting the EU, with details to be confirmed a year later – it was all looking a bit brighter, or at least, less confused.
Then Covid-19 hit. Covid-19 was global, but Britain was already in the bad books. And frankly, I think it’s fair to say that regardless of your political sympathies or your view on the pandemic or how other countries have dealt with it, the UK can’t claim to have handled it brilliantly.
As Merryn noted in a recent editor’s letter, the outbreak has highlighted the problems with having “a decision-making system that is both too centralised and too localised."
Anyway, the upshot of all this is that nobody wants to invest here. That’s a bit of an exaggeration but not a huge one. Global investors can’t find a bargepole long enough for the UK. They’ve been “underweight” Britain since the 2016 vote and they show no sign of changing their minds now.
In last month’s Bank of America global fund manager survey, the UK was viewed as one of the most contrarian bets in the market – which is to say, one of the most hated investments in the world right now. The UK is even less popular than banks. The only thing that beats the UK in terms of universal investor detestation is energy stocks. There is some overlap between the two, to be fair – the FTSE 100 is synonymous with the big oil majors – but even so that’s quite an ugly picture.
That said, it's understandable. If you’re a global investor, the main market you care about is the US, as it has by far the lion’s share of global market capitalisation. The UK only accounts for 5%-6% of global market cap. Is it worth doing the work? Frankly, not really. Might as well focus on how much Apple you should own instead.
One of the smartest fund managers out there is buying the UK right now
However, it’s not just global investors. Private investors (the likes of you and me, in other words) yanked £2.7bn out of UK equity funds in the three months to the end of August, according to the Investment Association (the fund managers’ trade body). So nobody’s really keen on the UK right now.
Does that present an opportunity? The trouble with being a contrarian is that you don’t know how long it's going to take for the market to come around to your point of view. As we’ve already noted, the UK has been despised for several years now.
That said, the key attribute a contrarian needs is patience. That means you invest for the long run – or rather, to be more specific, you invest in such a way that you won’t be forced out of the position either by margin calls or running costs. In other words, you don’t use leverage.
And interestingly enough, Nick Train, who manages the Lindsell Train UK Equity fund and the Finsbury Growth & Income investment trusts, has recently reported that he's been taking advantage of the UK’s current outcast status to do a bit of shopping for his funds.
As Daniel Grote points out on Citywire, Train recently updated his investors with the news that he’s been “unusually” active over the past 12 months – picking up three new positions in UK stocks. Why? “It’s simply that more opportunities are being presented to us as other investors give up on the UK.”
Clearly, no investor gets everything right. But Train can boast a superb record. And the UK is at such a low ebb that not very much needs to go right for things to improve. A less awful Brexit outcome than the papers fear.; some sort of light at the end of the coronavirus tunnel; or simply individual turnaround stories that make it clear that certain sectors and stocks aren’t on the floor for good.
On that note, don’t miss this Friday’s issue of MoneyWeek magazine, where Max King looks at some UK-listed recovery plays. They won’t all work out – but the ones that do could pay off big time. If you’re not already a subscriber, get your first six issues free here.