15 May 2024
A couple of weeks ago, markets were shocked when private bank Coutts announced plans to reduce UK equity holdings across the company's range of funds. While the reduction in UK exposure, equating to £2.7 billion worth of shares, is significant, the more surprising aspect is the negative sentiment towards the UK.
To put this into perspective, the £4 billion Coutts Managed Ambitious Fund and the £3.8 billion Coutts Managed Balanced Fund will sell a combined £1.5 billion of UK shares. This will reduce their UK exposure from 25% to 2.6% and 17.8% to 1.9%, respectively. The sale of UK stocks is expected to occur between 25 June and 3 July in what could be a challenging time for the markets.
While the proposed sale of UK stock represents just 0.08% of the UK market, the degree of "recalibration" is significant. The fund manager highlighted that the UK represents between 3% and 4% of the broader market on a global basis. While perfectly justifiable, and the statistics don't lie, the reduction in the two most significant funds to 2.6% and 1.9% is even lower than the UK's global representation.
This is undoubtedly a blow to the UK stock market, a significant shift in sentiment from a leading UK fund manager, with growing concerns others may follow suit.
Those looking for any degree of comfort from fund flows in the first three months of 2024 may need to look away now. According to data from fund network Calastone, UK investors poured a record £7 billion into equity funds, but £5.7 billion of this was invested in US equities. Over the same period, we also saw £2.1 billion withdrawn from UK-focused equity funds, following on from annual outflows of £8 billion in 2023.
Looking at this from an economic point of view, as the threat of recession in the US continues to recede, investors are looking to increase exposure to the world's largest economy. However, recent economic data from the UK was surprisingly strong, although this has yet to be reflected in short to medium term forecasts for the economy. As we await the long-expected reduction in UK interest rates, in a similar scenario to the US, could this eventually prompt a raft of upgrades in UK economic growth forecasts?
If there is one slither of hope, it is the significant increase in M&A activity in 2024, which currently stands at around $78 billion, as we covered in another article. While it's important to recognise that not all M&A activity has been successful, it does represent a significant increase in interest in UK companies. This prompts the uncomfortable question as to whether the rise in M&A activity is opportunistic or part of long-term expansion plans by UK and overseas counterparts.
While there are hopes that UK stock market valuations may be enhanced if M&A activity remains buoyant, this could be against a backdrop of not only Coutts reducing UK exposure but potentially other fund managers as well. As an acquisitive company, whether UK-based or overseas, might the announcement by Coutts delay your M&A plans until later in the year?
UK markets are valued at a significant discount compared to their international counterparts, but this has been an ongoing issue. The UK government is currently working with regulators and the stock exchange to enhance the attractions of UK markets, but this has had little impact so far. The Coutts strategy of reducing UK exposure caught many by surprise, but the wealth management sector is now considered on a global basis, with UK equities making up between 3% and 4% of international markets. This prompts the question, might we see other fund managers follow suit in the short term?
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