Asset management giant Pictet is increasingly buying shares in UK companies, despite the election and looming Brexit negotiations casting uncertainty over the asset class.
Investors usually lighten up on stocks in the summer, but the chief strategist at Pictet Asset Management, Luca Paolini, said there are currently many reasons for people to disregard the adage “sell in May and go away”.
The recovery in global markets, he said, has been fuelled by a pick-up in activity in emerging markets, while monetary conditions remain favourable worldwide as central banks continue to provide ample stimulus.
Mr Paolini said this reinforces the case for being overweight equities.
Last week, Natixis revealed that the most frequent question it had been asked by advisers was how long the equity rally will last.
The group’s investment chief David Lafferty said European equities presented an attractive investment opportunity, saying they look particularly cheap compared to the US.
Mr Paolini, however, outlined the case for UK stocks, saying shares in British companies look good value at the moment.
“Renewed sterling weakness, attractive stock valuations and the UK economy’s surprising resilience prompt us to upgrade our stance on British equities to overweight from underweight,” he said.
This aligns with the latest investor sentiment index from Lloyds Bank, which said sentiment towards UK asset classes remained broadly positive in May.
Investors still had a bullish outlook on UK equities, despite the month seeing a dip in confidence.
While the British economy showed signs of slowing earlier this year, its resilience after the EU referendum has caught many by surprise, with the sharp drop in sterling boosting the country’s competitiveness.
The Pictet strategist said the UK is one of two developed economies to see a sharp improvement in fundamentals over the past month, making the UK the second most attractive equity market in the developed world, beaten only by New Zealand.
But he accepted that Brexit will drag on the economy, while inflation is likely to erode disposable incomes.
Mr Paolini agreed with Natixis in saying European assets also look attractive, after Emmanuel Macron’s victory in France reignited investor appetite for European assets.
“In currency markets, the euro has climbed nearly 6 per cent versus the dollar over the past two months, and we think it may have further to go,” Mr Paolini said.
However short sellers predicting a hung parliament in next week’s general election are betting against UK companies.
Support services company Carillion is the most shorted UK firm, according to business analyst HIS Markit.
Traders are taking a punt that domestically focused UK companies would suffer in the event of a hung parliament. They were among the hardest hit in the wake of the referendum vote last June, with the FTSE 250 plunging more than 7 per cent in the aftermath.
Now investors are trying to predict which stocks could be the worst affected if the expected Conservative landslide does not materialise.
Simon Colvin, research analyst at Markit, said short sellers were “disproportionately targeting UK firms that earn a large portion of revenue from the British isle”.
According to the latest Financial Conduct Authority short position register, some 14 entities have taken bets against Carillion; one of the largest of these is a 3.4 per cent position held by BlackRock Investment Management. The business gets three quarters of its revenue from the UK.
There are also 10 positions registered against facilities management outfit Mitie. Investment groups including Artemis, JPMorgan and Ardevora have short bets against the firm.
Ocado Group and WM Morrison are also among the short sellers favourites, with a total of 16.7 per cent and 17.1 per cent of their stock being shorted respectively.
katherine.denham@ft.com
