Investment boss: US capital flight won’t necessarily benefit UK
Investors fleeing US markets won’t necessarily boost the value of those in the UK or Europe, a senior investment boss has warned, pouring cold water on hopes for a London Stock Exchange revival.
Last month’s Bank of America global fund manager survey found that investors were looking to cut their exposure to US stocks at record high levels, while a flight from assets has pushed down the value of the dollar.
While many, such as Sir Richard Branson, have predicted that the relative stability of the UK could woo overseas investors to put their cash into Britain, others haven’t been so sure.
“It’s an unwind of US equity valuation premium, which won’t necessarily benefit other other markets,” Dan Kemp, chief investment officer of Morningstar, told City PM.
Though Kemp noted “you only ever see structural changes with hindsight,” the behaviour of the dollar signalled to him that there was a clear drift away from investment in US assets.
“People are building in a greater risk premium into US businesses, so that might be a much bigger change, and that’s then backed up by flow data, which seems to indicate people finding more opportunities outside the US than inside the US,” he added.
“We’re seeing people think about the risk of the foundation of US assets, not because people think it is necessarily going to default, but you have that broader range of possible outcomes which have been built in.”
US markets initially sank following Trump’s ‘Liberation Day’, but have since recovered, leaving the buying opportunity for Kemp open only for a small period.
He did warn that overseas assets might see an initial boost from the flood of investors away from the US, but markets would quickly realise they were overvalued and readjust.
And while UK stocks are currently “a little bit below fair value,” he didn’t think there was substantial room for prices to grow as a result of the shift.
Kemp did note that the US dollar “still looks expensive compared to most currencies, compared to the yen, for example, it’s very expensive”.
However, he warned that currencies often act with “a weak form of gravity” to their fair valuation, meeting they can stay too overvalued or undervalued for “a long period of time”.
Instead, the CIO was looking more carefully at China, where he saw a large number of opportunities.
“We started getting enthusiastic when other investors said it was uninvestable, and we don’t believe that anything is uninvestable,” said Kemp.
While he acknowledged that stocks in China were more risky, and required more detailed analysis than those in the West, he highlighted a range of clear opportunities for investment.
“We saw in the China market where stocks were very cheap, globally competitive businesses, particularly globally competitive technology businesses, were incredibly cheap because of policy changes in the previous couple years.
“So we could buy very cheap, very good quality technology stocks, consumer stocks, and we just have to be aware that there’s a higher risk than in other countries now.”
When asked why China had failed to boom despite its cheap valuations, Kemp argued: “Everyone talks about being a long term investor, very few people can do it. So everyone is really looking for a catalyst before they invest.”