Some of the largest UK equity income funds open to advisers have been battered by uncertainty around the current Brexit deal.
Two days after the market embraced a bout of positivity on the news that the UK and EU had agreed preliminary terms of exit, the resignation of the Brexit secretary Dominic Raab, the secretary of state for Work and Pensions Esther McVey, and a host of junior ministers has scythed the value of sterling and sent the value of stocks exposed to the UK domestic economy into freefall.
House builders, banks, retailers and utility companies have seen share price falls.
Among the UK equity income funds with substantial holdings in this part of the market are the £5bn Woodford Equity Income fund, which has exposure to house builders, the £3.5bn JO Hambro UK Equity Income Fund, which has substantial exposure to UK banks, and range of income funds run by Mark Barnett at Invesco, which have exposure to UK property.
The house builders have been worst hit, with Taylor Wimpey, Barratt, and Persimmon all down more than 7 per cent on the day.
British Land is down more than 3 per cent and Lloyds Banking Group is down 4.7 per cent.
While the market movements have been predictable as investors scramble to position for what they think will be an economic downturn under a no deal Brexit, one aspect of the sell-off shows a sharp divergence in market opinion.
This centres around the share price falls for utility companies, with Severn Trent and United Utilities being among the worst hit.
Such businesses are often perceived to have defensive characteristics, as they sell products for which there is constant demand, regardless of wider economic conditions. They generally fall out of favour with investors when bond yields are expected to rise.
But as the ministerial resignation letters were piling up on the prime minister’s desk, the price of UK government bonds, known as gilts, was rising and utility company share prices were falling nevertheless.
Investors buy gilts when they wish to own a defensive asset class. But investors who buy gilts today will incur losses if interest rates rise or inflation goes up markedly in future, so owning gilts is taking a position that rates won’t rise, while selling utility companies is taking a position that they will.
The reason may also be that the market views the current Brexit turmoil as a prelude to a general election, and Jeremy Corbyn has stated he would nationalise utility companies should he get to power.
Paul Mumford of Cavendish Asset Management said: "As is always the case, business hates uncertainty, and investors are selling sectors they see as vulnerable to a messy Brexit and domestic political volatility, while others await more clarity.
"A third more fortunate group stands to benefit from the fall in sterling this morning. When the pound drops in value, exporters and companies in the FTSE with a large proportion of overseas earnings reap the rewards - as shown by the spike in the FTSE following Raab's resignation this morning."
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "If sustained, a weaker pound spells bad news for a retail sector which is already struggling, as it hikes up the price of imported goods and at the same time squeezes consumer incomes.
"We can expect continued volatility in financial markets while political uncertainty swirls around Westminster. However it’s best to keep investment decisions detached from politics, as the EU referendum amply demonstrated.
"In febrile market conditions investors will be well-served by avoiding knee-jerk reactions, and focusing on the long term prospects for their portfolio."
Ben Seager Scott, chief investment officer at Tilney, said investors should regard the political events as "noise" and do nothing, so long as they have a well diversified portfolio.
david.thorpe@ft.com
