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UK equity funds have bled more than $ 2 billion in the past two months, underscoring the extent of investor unease as a no-deal Brexit becomes more likely.
Investors have drawn net $ 2.4 billion from funds exposed to the UK stock market since early October, according to data provider EPFR Global.
Britain’s trade talks with the EU have grown increasingly tense in recent weeks, with both sides warning that the UK could exit its Brexit transition period without a trade deal in place. As the talks entered their home stretch before Sunday deadlineBritish Prime Minister Boris Johnson has said a no-deal Brexit is a “strong possibility”.
The latest withdrawals bring UK equity fund outflows since the Brexit referendum to $ 42 billion – nearly 17% of total assets held in strategies as of June 2016. This figure relates to equity fund flows British companies with variable capital in the world until the end of October. 2020.
The following Brexit uncertainty also hit the appeal of UK stocks among portfolio managers. The UK’s average level of exposure to global equity funds recently fell to an all-time high 5.8%, from nearly 9% at the start of 2016, according to Copley Fund Research, a consultancy firm.
The drop put Japan ahead of Britain as the second-largest country among global equity funds, said Copley, who looked at data from 387 global equity funds with $ 780 billion in active.
Steven Holden, chief executive of Copley, said UK stocks had been hit by “the uncertainty surrounding a post-Brexit trade deal and lingering concerns over Covid-19”.
British stocks were beaten by the uncertainty of Brexit over the past four years. This underperformance was exacerbated in 2020 by the coronavirus pandemic, which forced a wave of British companies to impose themselves brutally dividend cuts.
The FTSE All-Share index is down 12% year-to-date, while the US S&P 500 is up 12%.
However, the broad avoidance of UK stocks led some hedge funds, including Marshall Wace, to start betting on a bounce.
Global equity managers have reduced their exposure to a number of previously dividend-rich UK sectors, such as energy and financials, Copley found.
Only 28% of funds in Copley’s sample have exposure to UK energy companies, up from 46% at the start of 2019. Meanwhile, 51% of funds are invested in UK financials, up from 64% two years ago.
Instead, managers have crammed into tech and consumer goods groups elsewhere, such as Chinese e-commerce giants Alibaba and JD.com, and Taiwanese chipmaker TSMC, Copley said.
Despite fears of a no-deal, some investors are optimistic. About $ 100 million was invested in UK equity funds as negotiations between the UK and the EU unfolded during the week, before ending on Wednesday, EPFR said.
Alex Wright, director of the Fidelity Special Situations fund, said he was reassured about the preparation of British companies to no-deal by the “robustness” of supply chains in the pandemic.
He added: “Agree or disagree, the end of negotiations should remove some of the uncertainty that has plagued British stocks for the past five years.”
But veteran British equity manager Richard Buxton of Jupiter Asset Management has warned that international investors who have reduced their exposure to the UK will not necessarily rush once clarity emerges on Brexit.
“I think the process will be slow and many will want to wait and see how the UK behaves outside the EU,” he said.
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