Stocktake: Brexit continues to make fund managers wary of UK stocks
But is yet another decade of underperformance for UK stocks really that likely?
BAML’s surveys show UK stocks have been disliked by fund managers for the past five years. Photograph: Justin Tallis/AFP via Getty
Brexit-related progress helped British assets rally last week but the long-term picture remains bleak, according to Bank of America Merrill Lynch’s (BAML) latest fund manager survey.
UK stocks are the least likely to outperform over the next decade, the survey found. More than half of respondents said either emerging markets or the US would win that race; only about 3 per cent picked UK stocks.
The quants at BAML are more optimistic, saying UK stocks fall into the QaRP category (quality at a reasonable price). Earlier this year, Schroders noted UK stocks were trading at a 30 per cent discount to global peers (close to 30-year lows) as well as boasting a dividend yield of 4.5 per cent – again, well above its 30-year average of 3.5 per cent. For yields to revert to their long-term average, stocks would either have to rise or companies would have to cut payments by an even greater margin than they did during the global financial crisis.
BAML’s surveys show UK stocks have been disliked by fund managers for the past five years, while the Ftse 100 has gone nowhere in 20 years. If you’re a contrarian, you’re bound to wonder: is yet another decade of underperformance really that likely?
Woodford’s demise offers costly lesson
Any rebound in UK stocks will come too late for Neil Woodford, the one-time star fund manager who has been fired from his flagship fund. Trading in the Woodford Equity Income fund has been suspended since June; now it is to be shut down.
The extent of Woodford’s fall from grace has been stunning. Even sceptics could hardly have imagined Woodford, who made his name as a value investor with a taste for solid blue-chip stocks, would be undone by wild bets on a plethora of illiquid companies and start-ups. Clearly, Woodford bought into his own hype, and this hubris was his undoing, although the main lesson for investors is a simple one – past performance is no guide to future returns. One of the few UK commentators to repeatedly make that point in recent years has been Robin Powell of the blog Evidence-Based Investor. Unfortunately, this inarguable message was “drowned out by Woodford enthusiasts”, Powell noted last week, pointing to one especially extraordinary Scotsman article in 2015 headlined “Academics know nothing about investing”.
Woodford’s demise confirms the opposite is true. Those who thought otherwise have learned a valuable, very costly lesson.
US recession remains a real possibility
Investors came into October worried about global trade tensions, a no-deal Brexit and a possible US recession. Now the S&P 500 is nearing fresh all-time highs following good news on the first two fronts, while the US yield curve is no longer inverted. Does this mean recession is off the table?
An inverted yield curve, when long-term bond yields are lower than their short-term counterparts, is regarded as a reliable recession signal. Nevertheless, that doesn’t mean the un-inversion is cause for celebration, says investment analyst Joachim Klement. It is, says Klement, a logical fallacy to think the inverse of “If A, then B” is “If not A, then not B”. The “inability to do simple logic”, he adds, “is widespread in the investment world and one of the reasons why so many pundits can safely be ignored”.
Instead of pondering the nature of a logical fallacy, it might be easier to just look at the stats. Klement’s data shows that since 1976, the yield curve inverted and then steepened again (sometimes several times) before almost every recession. Interrupted inversions are perfectly normal before a recession. Over that period there hasn’t been one instance where an inverted yield curve wasn’t followed by a recession within two years. “I wouldn’t get my hopes up that this time is different,” cautions Klement.
Children: a bad long-term investment?
The above-mentioned Joachim Klement has an excellent blog at Klement on Investing, where he offers his thoughts on all things investment. Last week he asked a slightly left-field question: is the decision to invest in children a good one?
Contrary to popular belief, the research is “pretty unanimous” in finding children don’t make you happier, says Klement, with evidence indicating a “clear deterioration” in happiness once kids arrive on the scene. However, one of Klement’s colleagues said the research is wrong: yes, kids initially bring lower life satisfaction, but things improve when you have grandchildren. Klement returned to the research and discovered his colleague was right – grandparents who care for their grandchildren report less ill health and depression than those who don’t.
So, like any good analyst, Klement asks: should you invest? “The question I have to ask myself is, if I want to invest in something with a J-curve that is underwater for 20 years or so before I see a return,” he wonders. “And did I mention that the lock-up for this investment is also about 18 years or so? I am really not sure if this is the best investment I can think of.”