It is safe to say that UK equity markets in 2018 were defined, almost entirely, by Brexit. Or perhaps more accurately, by a weak pound as we await the UK’s (likely) chaotic exit from the European Union.
As the shape of Brexit – at the time of writing - remains unknown, that currency pressure shows little sign of abating as we conclude the year, and UK equity investors have suffered.
Investment Association statistics from October - the trade body’s most recent monthly figures - saw a net retail outflow from UK equity funds of £214m, with the average net retail sales for the previous 12 months even lower, at -£425m.
The UK was also consistently the worst-selling regional equity sector, losing assets to the tune of £1.51bn, £1.68bn and £1.1bn in the first, second and third quarters of 2018, respectively.
Yet there have been glimmers of hope. While beleaguered retail names were hammered in newspaper headlines throughout the year, the healthcare sector stood firm.
UK fund managers seem to share the view that UK stocks are cheap, with many bargains ready to be picked up.
Among The Share Centre’s top-five most traded stocks in 2018 was GlaxoSmithKline, epitomising the prolific merger activity seen across pharmaceuticals, one of the UK’s brighter prospects in 2018, sector-wise.
GSK’s share price rose more than 13 per cent to end November, with The Share Centre’s investment research analyst Helal Miah explaining that pharmaceuticals were among the few rising sectors in the FTSE throughout 2018.
He says this was helped by the “perceived stability” of drug sales, improving R&D pipeline and increased penetration into emerging markets.
Miah adds: “There has been a lot of M&A activity in the [pharma] sector lately and GSK has been at the heart of this, offloading its Indian consumer healthcare unit to Unilever, acquiring Tesoro, and merging the rest of its consumer healthcare unit with Pfizer, and that’s just in the last two months.
“There have been many more, smaller deals with more to come as the management look to focus the business towards pharmaceuticals and vaccines. The dividend remains stable and is one of its key attractions.”
Hargreaves Lansdown senior analyst Laith Khalaf names Royal Dutch Shell, Unilever and Diageo among the names holding up against the threat of Brexit, due to the falling pound boosting their international profits.
Yet with the economy still in positive growth territory, and business confidence standing above its long-term average every month this year, it suggests sentiment may be the core reason behind the falling share prices, rather than fundamentals, with Khalaf adding that investor confidence is at its lowest level in over 20 years, a period that has included the technology crash, and financial and eurozone crises.
As a result of this negative sentiment, UK fund managers seem to share the view that UK stocks are cheap, with many bargains ready to be picked up.
Shore Financial Planning director Ben Yearsley says: “When you can pick up Legal & General and Aviva with a dividend yield of about 7 per cent, on a price/earnings multiple of around nine, that’s madness. Some of these UK stocks are priced for almost Armageddon; it’s just not right.”
The most interesting thing for Yearsley over the past year is that various UK market cap indices have not fallen in direct correlation with their corresponding fund sectors.
He says: “It is striking that while the mid-cap index has been the worst year to date - underperforming both the FTSE 100 and the small-cap index, at fund level, small-cap funds have performed worse than those in the IA UK equity income sector or those in the all companies.”
He explains while mid-cap funds have marginally underperformed, small-cap funds have really struggled, which he says suggests most small cap funds have likely been more weighted to mid-caps than small caps.
AJ Bell data shows the FTSE 100 down almost 12 per cent at 18 December, with the FTSE SmallCap index down just more than 12 per cent, while the Mid 250 was the worst performer, dropping by just over 15 per cent.
Yearsley explains the typically more domestic focus of mid-caps sits behind that underperformance, whereas with larger cap stocks - as roughly 70 per cent of FTSE 100 earnings come from overseas - have seen their dollar-pegged earnings stand them in better stead than the mid-caps, due to sterling weakness.
He concludes: “This year for UK equities has been a year of pure Brexit; nothing much else. The US/China trade wars have hit HSBC and Standard Chartered mostly but Brexit and sterling have been the overarching theme for 2018 and are likely to continue until March next year.”
Sam Shaw is a freelance financial journalist and reporter.