Our stock market is now so far out of fashion among the available global choices that it represents a contrarian buying opportunityby Andy Davis / June 21, 2018 / Leave a comment
For the past few months, I’ve included a suggestion with this column for an area of the market or an asset that looks out of favour and that might be due a turnaround. But all the while I’ve been running this little experiment it has become harder to escape the impression that, as far as the rest of the world is concerned, the entire UK stock market has become just about the biggest turn-off they can think of.
Britain has been out of favour with international investors since the Brexit vote, thanks to the pound’s immediate slide, weaker economic growth and uncertainty over future trading arrangements, to name just a few factors. At the time, the vote caused stock markets to rise, as most companies in the FTSE100 earn income in other currencies, which rose in value against the pound.
But two years on from the referendum, it seems the country has achieved such widespread unpopularity that opportunists are starting to talk about it as a contrarian buy. This tends to happen when the value of an asset has fallen so far that people believe all the bad news must already be “in the price.” The conclusion often rests on decent foundations—being bearish about the UK is now an extremely “crowded trade” and once there is no one left to turn pessimistic, a reversal of sentiment becomes more likely.
I’ve seen various ways of expressing the depth of negativity about the UK market. One recent piece of American commentary pointed out that when investors turn negative on a country’s equity market, they will sell their shares in the index funds that track that market. Unless there are other buyers, for those shares, they can be cancelled, reducing the number in circulation. One large UK equity fund has seen around a quarter of its shares cancelled since early March.