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Institutional equity investors are taking their cash out of the UK at the speed of light as they now consider Britain to be “most out of favour” region anywhere on earth to plough money.
HSBC strategists Robert Parkes and Amit Shrivastava in bank’s Global Equity Strategy note stated that globally managed funds have drastically lessened the weightings of their investments in the UK in the aftermath of the June vote, and are progressively opting for continental Europe as a place to plough money into due to uncertainties caused by Brexit.
Here is an extract from Parkes and Shrivastava’s research:
“Since the Brexit vote, holdings of the UK have fallen by more than 100 basis points. Relative to history (on a z-score basis), the UK is now the most out of favour region globally. Active managers have been rotating into the Eurozone with Germany and Netherlands both seeing a modest rise in their holdings during this period.”
The duo proceed, saying:
“Since the referendum outcome, investors have shown a clear preference for the Eurozone over UK within Europe. The overweight position on UK has reduced by 100bps since end June. The Eurozone, over the same period saw a modest increase of 20bps.”
HSBC’s chart serves as an indicator how steep the decrease of holdings in Britain has been since the vote.There are several reasons to have caused such a drastic decline, but it is chiefly related to the effect dropping sterling has had on equities. As HSBC’s strategists say:
“The pound has weakened significantly post Brexit. Whilst this has boosted the UK market in sterling terms, it has been a double-edged sword for international investors’ whose fund performances are measured in non-sterling currencies. This important point, alongside the continued political uncertainty, may explain why post Brexit, international investors continue to head for the exit.”
Sterling has fallen 17% from its pre-vote level, and is currently trading at just $1.22 against the dollar. A study by Goldman Sachs has suggests that as much as 10% are expected further to fall. Consequently, stocks in the UK have significantly increased, hitting an all-time high in October.
However, about 70% of the revenue of the firms making up the FTSE 100 is received from abroad, which means they generate more money when sterling is weak.
This is due to the fact that the index is full of oil firms, mining companies, and pharmaceutical giants using the UK as a base but tend to denominate their assets in dollars.
This means that international investors acquiring assets in pounds, when they convert that money back into their local currency, receive much less, which makes investment extremely unattractive.
Despite UK’s economy holding up better than was predicted after the referendum, there are massive fund outflows. Preliminary GDP numbers showcased that the economy jumped up 0.5% in the third quarter of 2016, well above the 0.3% growth that had been expected.