Billions of pounds have been taken out of UK equities since the Brexit referendum of June 2016 but there are still opportunities that should not be overlooked, a conference has heard.
Speaking at the Investival conference hosted by AJ Bell yesterday (November 15), Mark Barnett, head of UK equities at Invesco, said global investors had taken the view that "politics are too hot", which overshadowed the fact the economy has not done as badly as many might have expected.
Mr Barnett said: "I have a myriad of other (investment) opportunities I'd rather be looking at elsewhere in the world, and therefore I would underweight UK equities.
"Within that category of UK equities, however, there is a subset of companies particularly exposed to the UK economy and those are the cheapest of all – I think that's really where the opportunities are."
Instead of UK assets, he suggests fund managers like himself have been seeking assets that offer uncorrelated returns to the economic cycle and political uncertainty.
He said: "They may be involved in things like catastrophe insurance or litigation or litigation finance or alternative lending etc.
"They're business that may have a cycle but they sit outside of the general economic cycle, I think they offer quite big attractions for funds like ours."
The comments came after figures released by the Investment Association in October showed investors have withdrawn £10bn from UK equity funds since the Brexit vote in June 2016.
UK equity income funds open to advisers were battered further this week by uncertainty around the current Brexit deal.
However, in reality the economy was doing "just a bit better" than was expected directly after the referendum, Mr Barnett said.
He said: "The overlay in the UK has absolutely been political – there has been evidence of the economy in aggregates since the referendum, and while it has performed a little bit worse since the referendum, it hasn’t been significantly bad.
"Actually, at the moment things are improving – the government is putting money back into the economy, it is talking about the end of austerity, and while this is mostly tinkering with the numbers effectively there is more government money coming back in, and the government stands ready to do more if they need to."
Also speaking on the panel, James Harries, a fund manager at Troy Asset Management Limited, told delegates that "while we have been in a rising rate environment, we are not in a rising rate environment anymore".
Nick Gartside, managing director at JP Morgan Asset Management, however disagreed.
Mr Gartside said: "Let's be honest, central bank policy rates are just ludicrously low, they've set at a level that is suitable for an emergency.
"Are economies in an emergencies? No. They're actually growing at a pretty healthy rate.
"If you look at the UK, the average Bank of England base rate since 1700 is 3.5 per cent – so can rates double from where they are now? Absolutely. And they will."
He said the trickier economy to predict was actually Europe, which was "in a trap due to negative interest rates – a disastrous economic policy".
Mr Gartside said: "It embeds a deflation mindset and of course they target inflation, and when you look at inflation in the eurozone, it's at rock bottom levels.
"Probably the best you can hope for there is to go from -14 to 0."
Mr Barnett also noted that a higher rate environment posed the risk that, because policy settings have been very low, decisions have been made by consumers and companies on that basis, and these may now have to be adjusted for a higher rate environment.
He added: "We [also] don't know how the US consumer is reacting already to an environment of higher rates.
"My sense is that having already had a number of rate rises as we just heard, the risk of a policy mistake is higher now than ever in the last 10 years.
"In part, because rates haven't moved for 10 years so there's been no change. But I do feel that – listening to what governments are saying – they are absolutely intent to keep moving rates up."
Also speaking during the session, Ainslie McLennan, fund manager of UK property at Janus Henderson, pointed out that the market has historically operated quite well in a normal interest rate environment of between 3 to 4 per cent.
She said: "The yield on portfolios like ours is about 5 per cent. So we feel quite comfortable about it. The important element for us is that it is slow and steady, as opposed to drama.
"Commercial property often gets hit by the idea of drama more than what happens in real terms, and so we're kind of sensitive to that. But if its slow and steady, it would be fine."
victoria.ticha@ft.com
