UK keeps calm in the QE storm

UK markets were plunged into panic at Bernanke’s announcement that the quantitative easing plug is to be pulled but the mood appears more upbeat on the economic front

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The Federal Reserve chairman Ben Bernanke‘s announcement that the quantitative easing plug was gearing up to be pulled sent markets into turmoil recently, with the UK being no exception.

The US’s planned tapering and subsequent shutting down of its $85bn monthly bond buying programme, sent markets into panic and the FTSE 100 lost 3 per cent in a single day’s trading, on 20 June following Bernanke’s statement. The collapse marked its worst one-day fall since September 2011, as it dropped below the 6,200 mark.

Just over a month ago, the UK’s blue-chip index was on a trajectory heading towards its former all-time high, moving over the 6,800 mark. But much of the good work has been unravelled by the market uncertainty since. In just a month, the FTSE 100 has shed some 9 per cent, dragging its 12-month gain back to just circa 11 per cent. The wider FTSE All-Share index lost 8 per cent in the 30 day period.

However the average UK fund has managed to do that much better since this time last year with the mean return from the IMA UK All-Companies sector at 19 per cent for the term.

But despite the market rollercoaster, multi-managers are cautiously sanguine towards the UK and its longer term outlook.

Looking back at the recent rally leading up to the latter volatility, John Husselbee, chief executive of North Investment Partners, says: “Arguably the run went too far too quickly. But the events of the past few weeks have made many good stocks even more attractive. Leverage has been a driver of the turmoil. But overall the UK right now looks attractive.”

Not so long ago talk of a possible triple dip recession was common, and the fact that the UK lost its AAA credit ratings from both Moody’s and Fitch, leaving it with just the one from Standard & Poor’s did not help sentiment.

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Husselbee, who is currently slightly underweight  in the UK, adds: “The UK has been stuck in the middle between US policies which have been successful and Europe’s which have not.”

But the mood now appears more upbeat, on the economic front particularly after synchronised positive readings from the Purchasing Manager Index surveys covering manufacturing, construction and services.

As a result of these factors, Aidan Kearney, co-head of multi-manager funds at Aberdeen Asset Management, says: “Second quarter GDP now has a better feel to it and should build on the 0.3 per cent growth from the first three months of the year.”

But he adds: “It is abundantly clear that the recovery in economic growth needs to become more sustainable and entrenched.”

Gary Potter, co-head of multi-manager at F&C Investments, has recently gone from neutral to slightly overweight in the UK. He says: “In terms of how the UK compares to other economies, it is lagging behind the US but investors do not invest in the UK economy but in the UK stockmarket, which derives the majority of its earnings from overseas. Overall we believe that the UK looks a reasonably interesting place.”

However the problems overhanging the UK, namely the enormous public debt pile, will best be addressed through a growing economy, to which the support of a vibrant business community and a confident consumer, both of whom will be instrumental in generating increased tax revenues, are essential asserts Kearney.

He says: “A number of managers have increased cyclicality given this is where they perceive more value against the more expensive bond proxies, this leans into a view of a better Britain. In our opinion it is likely that the Bank of England, under its new stewardship, will continue, if not enhance, its stimulus measures in order to ensure that this is the case. So while the early signs are encouraging, incoming Bank of England governor Mark Carney and the UK economy have much work ahead.”

Potter too will be closely watching Carney’s strategy. He adds: “The fact that the UK has its own currency is a significant plus, that gives it flexibility and the UK also has interests in many areas. We have some fantastic global companies here. When merger and acquisition activity picks up, the UK will be a beneficiary.”

But managers warn that investors need to be mindful of chasing expensive defensive stocks such as pharmaceuticals and tobacco. Potter says: “It is about what you buy and the price you pay for it. But that is not to say there is not growth opportunities out there, as we believe there are.”