International Investors Continue To Shun UK Equities

We’ve spoken before about the discounted bargain the current valuations of London-listed equities currently look like they represent. Brexit uncertainty has scared investors off and British companies now generally look a lot cheaper than international peers with similar fundamentals for no other obvious reason than the fact they are headquartered in the UK.

Many London Stock Exchange-listed companies, especially the larger FTSE 100 constituents, don’t even derive a majority, or even a particularly large minority, of their revenues from the domestic market. But despite looking like a bargain, international institutional investors are still not being tempted back. Are they missing a trick or are global institutional investors seeing risks that those of us investing online in British equities should perhaps be warier of than we are?

UK equities are certainly cheap compared to U.S. peers. Since the 2016 Brexit referendum prices have gained just 5% in dollar terms and have an average price/book ratio of x1.8. Over the same period the S&P 500 Wall Street benchmark has returned almost 40%. But it now trades at a price/book ratio of x3.4 – almost twice that of the FTSE 100.

However, with little to no progress around post-Brexit clarity in the 2 years since the decision to leave the EU was taken, international investors believe the lack of certainty equates to a risk that the valuation ratio is not attractive enough to compensate for. Investors are, if anything, more concerned now than they were a year or two ago, seeing a series of extensions to Brexit as the most likely scenario, with growth continuing to suffer as a result.

It hasn’t, however, all been one-way traffic of international investment capital leaving the UK. Investment data group EPFR Global figures show heavy outflows over the second half of 2018 turned positive in February. The presumption is that value investors returned to UK equities, encouraged by attractive valuations. But on the whole, investors see no reason to take a risk on Britain under current conditions. The pan-European benchmark, the Euro Stoxx 600 also offers a price/book ratio of, like the FTSE 100, x1.8 with a better risk profile.

International fund managers do expect the UK to bounce back once Brexit uncertainty is removed. But most plan to allocate capital at that point, seeing little reason to expose themselves ahead of any decision. But while investor sentiment on the UK is nervy, it doesn’t appear to be overly negative. Neither UK equities nor pound sterling have seen worrying levels of short positions being taken on them. This suggests stagnation rather than any major slump is considered the most likely outcome of continuing uncertainty hampering growth.

For those investing online for the long term, one thing to keep in mind is that institutional investors have a shorter term outlook than it is necessary for anyone investing with a 10 or 20-year horizon. If funds see two or three consecutive years of poor returns capital usually begins to flee. That makes the current situation in the UK more of a turnoff. However, for anyone investing into an ISA or SIPP and not intending to cash investments in any time soon, there is plenty of time to wait for UK equities to recover from their Brexit malaise. And when they finally do so, the returns would be especially attractive, rebounding from discounted prices.