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1 chart that shows why UK equities haven't performed this badly for 40 years

UK equities have suffered their worst three year underperformance since the 1970s
UK equities have suffered their worst three-year underperformance since the 1970s

It is almost that back to school time of year and hence a suitable time to think about new dreams and new strategies.

Now if you are an investor in the UK market it has been a rotten summer for holders of a few specific well-known UK stocks.

First Provident Financial – a lender to the unbanked or those needing a touch of financial assistance before pay day – came a cropper with a news update that included a profit warning, a financial regulator investigation, a CEO resignation and a suspension of the dividend (only!).

Unsurprisingly the shares dived very materially.

Then the world’s largest advertising company WPP attempted to blame the fickle requirements of some of their biggest consumer goods customers for their own guidance miss – but listening to management commentary I came away more with the impression that management just took their eye off the ball.

Sir Martin Sorrell, CEO of advertising group WPP
Sir Martin Sorrell, CEO of advertising group WPP

Certainly some of their peers racked up recent impressive trading statistics.

And finally a week or so ago was the big slide in the shares of Dixons Carphone blamed primarily on our fading propensity to switch our mobiles phones. With imminent new offerings from Samsung and Apple, there’s a big surprise!

Look carefully at the above and you will see that these three names did not help themselves.

At all times there’s good and bad stocks in an overall stock market index but what is currently undeniable is that the pessimism about the UK market and the pound is currently very high – and that’s because recent performance from the perspective of the average international investor has been very poor.

As one leading investment bank noted in a recent research note: ‘In US dollar terms, UK equities have suffered their worst three year underperformance since the 1970s’.

Any reference to business and stock market debacles of 40 plus years ago is a sad indication of where UK stocks have fallen too in the global pecking order.

Of course this is highly influenced by the weak Pound which is currently kicking around a 50 year low on a trade weighted basis.

So a weak pound, a weak stock market in the eyes of international investors and additionally the jagged rocks of Brexit negotiations and domestic political angst threatens the sea worthiness of the Good Ship United Kingdom over the next year or two additionally.

Surely the share price shockers some of the leading UK names suffered in August is just a precursor to further volatility?

Of course in a global, interdependent world you cannot rule anything out, but typically too much pessimism is more an opportunity than a threat.

As the legendary investor Sir John Templeton famously once noted: “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria”

I doubt if prospects for UK Equities – even the more domestically centric ones – are as bad as any time since the 1970s.

The UK economy is likely to grow and whilst consumer spending is patchy and wage growth is limited, unemployment is low.

The Bank of England are not not likely to change their ultra low interest rate policy
The Bank of England are not not likely to change their ultra low interest rate policy

Meanwhile the Bank of England are not going to change their ultra low interest rate policy anytime soon.

Similarly the Pound is not irrevocably sunk given its recovery against the US dollar this year whilst parity against the euro is a pipe dream unless the continuing Eurozone collectively becomes a lot more dynamic.

Whilst the UK’s budgetary contributions are helpful, why do you really think Germany still want the UK within the European Union?

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As a partner to push more business-friendly / less subsidy-intensive regime. It would be embarrassing if the UK became less business and economically dynamic than the overall Eurozone. With a compromise heavy Brexit transitional solution on the cards I do not see that happening soon.

So really the fear in the UK stock market returning to an economic generational yesteryear is based on UK domestic politics doing just that.

I did not know the world’s great stock market thinkers cared about Jeremy Corbyn quite so much.

If you do not agree then form an orderly line to buy UK stocks: back to school, back to work, back to investing.

Chris Bailey has over 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’.

The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investments.

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