UK retail investors have withdrawn £27bn of investment out of UK equity funds in the past three years, with £9.85bn of that being withdrawn in the past year. Will that very substantial withdrawal of funds from UK equities prove to have been poorly timed?
UK-based retail investors, like many, may have been spooked by political instability over the past few years by major events such as the UK leaving the EU. With the UK walking away from its biggest trading partner, many investors will have doubted the long-term performance of UK equities.
With Brexit fresh in investor’s minds they have then had to absorb the shockwaves set off by the Liz Truss/Kwasi Kwarteng "mini"-Budget in 2022. This triggered a large drop in the value of the pound against the dollar and near meltdown in UK government bond prices.
As the UK seemed to have lost its status as a dependable low risk market, retail investors have increasingly flocked to the US market. With the AI boom reaching its zenith in the first half of this year, much of the outflow from UK equity went directly into US tech stocks.
The US markets have been performing remarkably well in the medium-term – the S&P 500 is up 45 per cent in the past 18 months.
As well as shifting to US equities, retail investors have also seen UK gilts as an attractive alternative to the stock market in the last year and a half. However, the capital value of government bonds – especially long-dated gilts – are unlikely to provide much of a surprise on the upside unless interest rates fall faster than the market currently expects.
So have those UK retail investors that have pared their exposure to UK equities down to the bone done the right thing; have they headed for the exit just as the performance of UK shares has started to improve?
On some measures UK companies have actually been doing well. While the FTSE 100's performance has clearly not impressed, the UK large-cap shares (the upper end of the FTSE 100), when adjusted for the reinvestment of dividends, are up 35 per cent in the last three years. By contrast, global large-cap shares (adjusted for the reinvestment of dividends) are up just 27 per cent.
The concern is that many retail investors may have followed the headlines and left the UK market near its trough and switched into other markets that may be overbought and near their peak.
The UK stock market is home to a lot of high-quality companies that have traded at an undervalue for many years, particularly when compared to US companies.
A recent Goldman Sachs report shows the UK stock market trading at a -56.42 per cent discount to the forward PE ratios of US counterparts. FTSE 100 yields are also twice that of the S&P 500, this makes them very attractive investments.
