Investors turn to UK assets

Investors turn to UK assets

UK assets are attractively valued despite the lingering political uncertainty, according to a range of investors.

Ed Smith, head of asset allocation research at Rathbones Unit Trust Management, believes UK assets will do well in the long term despite the threat of a no-deal Brexit.

He said Rathbones' portfolios have increased exposure to UK shares in recent months, due to the defensive nature of the earnings of many companies in the FTSE 100.

He said: "Most of our clients have a ten year plus time horizon. When you look at the long term drivers of the performance of a currency, this includes the relative productivity rates, the relative savings rate, the pound is extremely cheap right now.

"I also think that while a no-deal Brexit would lead to bleak levels of economic growth for the next decade, I think the idea that lots of money could fly out the door is over done.

"People from around the world will still want to buy UK property and other UK assets and there are lots of things politicians can do to encourage research and development that can offset that."

The desirability of UK assets to overseas investors is relevant to the performance of the currency because the UK runs a current account deficit.

This means the UK imports more than it exports, and so has to send more sterling out of the country to pay for imports than it receives of other currencies for UK goods. This imbalance weakens sterling relative to other currencies.  

The country funds this through the sale of UK assets, such as gilts and property. Were those assets to become less popular with overseas buyers, then the overall effect is a weaker currency.

Torcail Stewart, who runs the £950m Baillie Gifford Strategic Bond fund, said he has been buying UK corporate bonds rather than those issued in the US, because the persistent negativity around UK assets means the bonds of UK companies are trading at valuations he considers to be cheap.

Fahad Kamal, chief market strategist at Kleinwort Hambros, said: "We regard political uncertainty as short-term noise, and it doesn’t matter over the long-term, UK equities have actually produced decent returns since the Brexit referendum. Both the FTSE 100 and the more domestically focused FTSE 250 have defied the gloom."

Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, said: "In the banking collapse of 2008 our currency crashed 25 per cent and has effectively stayed down at that level since.  

"The pound rose in 2014 and then crashed again from mid-2015. [It is a] myth that the EU referendum pulled down our currency but it had nothing to do with that and, in truth, the currency has been falling since the 1920s."

He added: "The currency appears to have bottomed, for the medium to long term, with Carney's rate cut in late 2016. Since then each trough in the level has been higher than the prior troughs."