Despite uncertainties over the UK general election and Brexit, one in three financial advisers believe that UK equities will generate the ‘best return’ for their clients over a three to five year investment period, according to research from Aegon UK.
However, there was a notable split in adviser opinions of the 102 IFAs canvassed in March, with a further 16 per cent viewing UK equities as the most overvalued asset class.
The results come as the UK prepares to negotiate its departure from the European Union, which has been linked to a decline in Sterling against other currencies, and a return of inflation, which has now breached its 2 per cent target.
The results suggest that advisers are on the whole focused on positive market returns and are optimistic about continued resilience in economic measures such as consumer spending and employment data.
Four months into Donald Trump’s US presidency, advisers have also signalled a move away from US equities, which have outperformed most equity markets since 2009.
Nearly two in five (38 per cent) financial advisers think that US equities are the most over-valued asset class, a sentiment backed by high price to earnings ratios, a strong dollar and – to quote Warren Buffet’s favourite valuation measure – a market cap to GDP ratio that’s nearing heights last seen in the US shortly before the Dotcom bubble of 2000.
After UK equities, emerging markets also proved popular with advisers, having been unloved in the markets for a while, with 20 per cent believing that they will generate the ‘best return’ over the medium to long term.
In contrast, fixed income has fallen from favour, with just 1 per cent of financial advisers believing corporate bonds and gilts will provide the ‘best returns’, largely driven by yields that are at historically low rates at the long end of the market, and a rise in inflation.
Nick Dixon, investment director at Aegon UK, said: “Developed markets like the US have outpaced other equities in recent years and now appear to be a victim of their own success with financial advisers turning to alternatives that offer the potential for better returns.
“While advisers are pointing towards long-term value in UK equities, the split in their opinions is reflective of continued uncertainty about the longer-term impact of Brexit.
"A rise in inflation and stunted wage growth signal a warning for financial advisers and demand a higher margin of safety as the volatility of the pound and political strain continue to pose a risk.
“While we too favour UK and European equities over those in the US at present, we are taking a more cautious approach more generally.
"More broadly markets look fully valued by comparison to historical norms. Bonds, which are traditionally used to reduce risk and aid diversification, currently offer very low yields by historical standards, and bonds currently bear elevated capital risk.
"As a result we have increased cash weightings in our core and select portfolios – an approach that seems prudent when such valuations are prevalent.”
Darius McDermott, managing director of Chelsea Financial Services, agreed that UK equities should provide better returns than US equities over the next three to five years.
He said: "If you look back at historical valuations compared to where they are now (US) then they are expensive and annual returns could be expected to be as low as 1 per cent or so. That is a far cry from the returns investors have become used to over the past three years.
"We also agree that bonds are not attractive. We haven't like them for some time and although yields have continued to fall against the odds, somewhat, we really don't see how the bond bull run can continue."
However, Mr McDermott does not think that UK equities are likely to do better than all other equities though.
He said: "We see value in both European equities and emerging market equities and think returns in these markets could be similar or better than the UK over the period.
"We like GAM Star Continental European and T Rowe Price European Smaller Companies in Europe, and for emerging market equities, M&G Global Emerging Markets and Lazard Emerging Markets."
stephanie.hawthorne@ft.com
