(Financial News) Global fund managers are turning cool on US equities while picking out the unloved UK as a top tip for where to invest in 2020.
After a stellar run in 2019, with returns of 27.9%, fund managers are becoming cautious on the outlook for the US stock market.
Jeremy Podger, manager of Fidelity’s £2.7bn ($3.5bn) Global Special Situations fund, said: “While the market focus remains on the trade war, one issue that is not uppermost in investors’ minds currently, but will become increasingly so, is the election cycle in the US and the potential for a lot more domestic political noise in the US.
“This, in turn, could mean that other parts of the global equity markets will become more attractive than the US, which at the moment is a consensus overweight position for most investors.”
Nevertheless, scepticism on the US is catching on. The latest edition of Bank of America’s monthly survey of fund managers, published on December 17, reported a 5% drop in the number saying they are “overweight” the US, i.e. they hold more in US stocks than the country’s position in global indices would suggest.
At the same time, there was a notable easing of pessimism towards the UK. Among the roughly 250 fund managers in the BofA survey, a net 13% are underweight British stocks — that is, 13% more of them hold a below-average position in the UK than an above-average one — but a month ago, that proportion was 21%.
Bank of America’s analysts noted that, since the Brexit vote in 2016, the average level of UK “underweight” positions reported in the survey has been 28%. They wrote: “Investors have been closing their structural UK underweight over the past two months in anticipation of a majority Conservative government.”
While they are still cautious on the country’s economic prospects in the coming year, as prime minister Boris Johnson attempts to negotiate an EU trade deal in record time, professional money managers reckon Brexit has made the UK’s stock market so unloved in the past three years that any improvement is worth buying into.
Fidelity’s Podger said: “Investors have been taking money out of the UK stock market since the [2016] referendum and it is generally under-represented in many international portfolios.”
Podger added that Johnson’s recent general election victory “could be a trigger for these investors to ‘neutralise’ their exposure, while existing investors are unlikely to sell for now. In my portfolios I have been adding to domestic UK exposure in recent weeks.”
Natixis, the French fund manager that regularly polls its in-house analysts and fund managers on their outlook, said their take on the UK has improved dramatically in the past six months.
In June, Natixis’ poll gave a “bull-bear” score of +2 to US large-cap equities, compared to -15 for UK stocks. Six months later, US large-caps have declined to -2 while UK stocks have climbed to +7, in Natixis’ managers’ estimation.
Natixis polled 17 of its investment strategists around the world for its survey, including staff from subsidiary companies such as Boston-based bond specialist Loomis Sayles and Houston-based Vaughan Nelson Investment Management.
The French group noted its investing staff are, collectively, “relatively neutral on US equities. On average, respondents set a year-end 2020 target forecast for the S&P 500 at 3,074, implying little change in the coming year (-0.2%) compared to its level when the survey was in field.”
Meanwhile, “with hopes for a softer Brexit, sentiment toward UK stocks improved with significant upgrades to UK and European equities. The biggest gainers across the report’s bullish/bearish ranking of 20 asset classes were by far UK equities, eurozone large equities, and non-US developed equities. Emerging markets equity is still beloved, moving to the number one spot.”
However, not all fund managers are ready to charge into the choppy waters of Brexit just yet. NN Investment Partners, the Dutch asset manager that also polls professional investors, found 46% of them held a positive view on the UK stock market in early December — a result it declared “surprisingly” high.
Patrick Moonen, principal strategist for NN’s multi-asset funds, wrote: “A possible explanation for investors favouring UK equities could be their current valuations, or it could be because investors are hoping for a big fiscal stimulus.
“There are some good value opportunities, given depressed stock valuations, but we retain a neutral stance on the UK in our asset allocation, as the tail risk of a hard Brexit at end-2020 remains an overhang.”
