UK assets look cheap right now, but the political uncertainty is such that most other asset classes represent better value, according to the manager of the UK's oldest investment trust.
Paul Niven runs the £4bn Foreign and Colonial investment trust, which has been around for 150 years. It has paid a dividend for every one of those years, and increased the dividend for over forty years in a row.
Mr Niven has been at the helm of the trust since 2014, and for much of that time has been reducing the UK exposure of the fund.
He said this was to make the trust more global in its focus. Mr Niven was initially cautious about reducing the UK exposure as a significant slug of the income in the trust was generated from the UK.
But he said there hasn’t been much difficulty in finding income from overseas equities, reducing the long-term need for the trust to invest in UK assets.
In the short-term, he said the UK market looks “cheap” but the risks are too great.
Mr Niven said: “You have the Brexit negotiations. I can’t see an outcome that could be positive, the best that can happen is a long transition period and that will create a lot of uncertainty.”
Chris Godding, chief investment officer at wealth manager Tilney said he is very confident that global equity markets will perform well in 2017, but he is also wary of investing in UK assets.
Mr Godding said equities should perform well and global economic growth continue despite higher interest rates and tighter monetary policy.
He flagged traditional economic theory that economic growth is a function of the supply of money and velocity of money - the speed at which it moves through the economy - as the indicators he is watching.
In times of economic growth and economic confidence, the velocity of money is fast, as people spend and borrow. If people are not confident about their economic prospects they tend to hoard cash and restrain from borrowing, which means the velocity of money slows down.
Since the financial crisis, according to Mr Godding, central banks have concentrated on the supply of money, increasing it via quantitative easing to provoke commercial banks to lend more. Mr Godding said this policy has led to higher asset prices and improved economic growth.
As the US Federal Reserve and other central banks stop creating extra money, it might be expected, according to Mr Godding, that asset prices and economic growth suffer.
He said he expects the speed money moves through he economy to pick up the slack as low unemployment increases the level of confidence in the world economy, boosting growth.
But Mr Godding said his optimism about global markets does not hold for the UK.
He said the uncertainty of Brexit is likely to mean confidence about the health of the economy remains muted, and that means the velocity of money in the UK will not pick up, even as tighter monetary policy around the world takes effect.
David Scott, an adviser at Andrews Gynne in Leeds, said declining UK consumer confidence bodes ill for the outlook for the UK economy.
He said he is less sanguine about the prospects for global markets as quantitative easing comes to an end.
Mr Scott said: “The main Central banks around the world are promising to "normalize" their monetary policy extremes in 2018. But you can't "normalize" markets that are now entirely dependent on extremes of monetary stimulus, as attempts to "normalize" will break the markets and the financial system”
”Liquidity refers to the pool of credit available to refinance or roll over existing debt. If I’m having trouble paying my credit card, for example, and there’s plenty of liquidity in the credit system, I can obtain a larger line of credit and borrow enough to pay my monthly principal and interest on the existing debt.
"If I can refinance my existing debt at a lower interest rate, so much the better.
"Central banks can buy public and private debt (government and corporate bonds, mortgages, etc.), effectively transferring debt from the private sector to the public sector.
"These are the basic moving pieces of the credit expansion that has fuelled both the “recovery” and the reflation of asset valuations, which have now reached historic extremes.”
David.Thorpe@ft.com
