The investment drama of a-weighting currency change.
I was presented very recently with a piece of investment bank ‘research’ that made a bold change in recommendation. The piece heralded the first time in five years that the particular firm’s ‘strategy’ team had gone ‘overweight the UK equity market’, having recommended being ‘short’ for practically the entire period since the Brexit Referendum.
For those of us who have persistently maintained the UK has been cheap not despite Brexit but because of it, this capitulation was not merely a long time coming, but very much a contributor to our frustration. For even when fundamentals suggest one thing, if there is a large enough body of ‘deniers’, fundamentals cannot fail to be subverted. In few instances has this been more the case than the general negative mood towards UK equities. After all, the reality is that if enough of those influencing markets are of an opinion then that opinion cannot fail to be self-fulfilling, however devoid of fundamental fact it might be. JM Keynes articulated this point far better than I have or can.
Rather than focus in what follows on the earnings and valuation fundamentals favouring UK equities across the vast breadth of the FTSE250, I want to reflect on a curious corollary from the ‘research’ cited above. So, what is my reflection on ‘strategic’ and historic change of tune towards UK equities?
Those expecting the pound to continue to wallow, or indeed weaken, will believe the FTSE100 is, ceteris paribus, a far better place to be invested in the sterling equity space than the more localised FTSE250, which is generally negatively exposed to sterling weakness. There are others like me, convinced sterling is poised to do what it did from late 1996. After four years of weakness following its shock ERM exit in September 1992, the pound gapped-up impressively – see charts 1 and 2.