Markets might just have peaked, with signals of strong inflows into investment funds on the rise, according to Jason Hollands, managing director, Business Development and Communications, Tilney Investment Management Services.
Recent data release by the Investment Association for the month of June has revealed evidence of “buoyant investor activity” with £2.9bn of net inflows from retail investors into investment funds in June this year, compared to a £3bn net outflow in the same month last year, when the UK was in the midst of the Brexit referendum.
It is also worth noting that the twelve months that followed the poll and period of outflows, stock and bond markets delivered stellar returns for those that stayed put or invested further, Hollands pointed.
Indeed, with the latest data completing the first half picture for 2017, the first six months of 2017 have proven a record breaking period for inflows for the UK funds industry with retail investors pouring £18.4bn into funds over this period.
“For the industry, which has been battered by recent criticism, this is undoubtedly cheery news, especially at a time when there is a lot of noise around global uncertainties and the overall UK Household savings ratio is very weak,” said Hollands.
‘Chasing recent positive returns’
“But it is also the case that the investing patterns of retail investors have periodically been an indicator of when markets are nearing their peaks, as retail investors have habit of chasing recent positive strong returns after the event, while panic sell during periods when markets decline and valuations might actually represent a more appealing entry point.”
For some commentators, Hollands, pictured left, added, concerns about current stock and bond valuations at a time when many indices are near record highs, surging inflows from retail investors will undoubtedly be seen as further “evidence” that we may be entering the last days of the current bull market.
However, beneath the headline fund flows in the Investment Association data, a more “nuanced picture” emerges than one of “euphoric, cavalier, over confidence” by retail investors, as the areas that have attracted the greatest inflows in June were not equities. Instead, the oft perceived “safe havens” of fixed income (£1bn), mixed assets (£905m) and money market funds (£237) have proven popular.
Equity funds drop
Equity funds in contrast scraped in with just £166m of net inflows overall but within this, UK equity funds, typically the anchor for UK retail investors, got a thumbs down with £1.1bin of net outflows.
“In my view, there are reasons for concern in this data since fixed income, traditionally seen as a defensive asset class, currently has deeply unappealing risk/ reward characteristics chiefly as a result of the distortions created by record low interest rates and repeated Quantitative Easing programmes,” said Hollands.
“Yields on UK government bonds are very low, especially after inflation is factored in and there is very little, if any, margin of safety in bond market. Rates will not stay at these levels for ever and so those piling in now could end up staring at capital losses when policy normalisation is priced in.”
While there is some nervousness about historically high equity valuations amongst professional investors, the primary source of concern relates to the US market and this is driven to a considerable degree by the so-called ‘FANG’ (Facebook, Apple, Netflix, Google) stocks and wider technology sector.
Compared to longer term trends, as measured by Cyclically Adjusted Price / Earnings ratios, other developed equity markets though not cheap are broadly in-line with longer-term trends, Hollands adds.
“The wariness of retail investors towards UK equities, may well reflect concerns around the fragile UK political situation and especially the uncertainties around Brexit, of which we are continuing to endure a daily diet of gloomy warnings,” he said.
“Whatever ones views on the outlook for the UK economy, the shunning of UK equities undoubtedly reflects a common confusion among investors between where listed companies are domiciled and where their underlying economic exposure actually is – as these are two very different things.
“It is perhaps not widely understood that the relationship between domestic UK growth and UK stock market is extremely tenuous as the UK stock market is a highly international in nature, with the FTSE 100 in aggregate having more revenues exposure to both Emerging Market regions and Continental Europe than it does to the UK.”
“In fact the high exposure of UK equities to overseas markets means that some of the perceived negative outcomes of Brexit uncertainties, notably Sterling weakness, actually benefit UK-listed companies with international earnings. The shunning of UK equities therefore seems unwarranted,” he said.
Amongst the UK equity funds that Hollands rates highly, i.e. those which the Tilney analysis indicates have very high international earnings exposure in their portfolios are as follows:
|Fund||Est. Overseas Revenue|
|CF Lindsell Train UK Equity||70%|
|AXA Framlington UK Select Opportunities||68%|
|JO Hambro UK Opportunities||67%|
|Threadneedle UK Equity Income||64%|
|Liontrust Special Situations||60%|
|Majedie UK Equity||60%|