When I heard that Liz Truss resigned as the UK’s Prime Minister, I thought to myself: “How will investors react towards UK shares now?”
What is the outlook for UK shares?
The latest fund flows data was not encouraging. Looking at the numbers from Refinitiv, I saw that across all asset classes, not just equities, but also fixed income and more exotic strategies, investors pulled their money out of UK funds during September.
The negative investor sentiment may endure for a while. But is it a reflection of the fundamentals underpinning UK businesses? Prices reflect what the market is willing to pay for an asset. However, this piece of information may not always reflect the economic reality of the asset.
Prices can be depressed too much, or they can be too high. This happens during periods of increasing uncertainty, such as this one. Indeed, the FTSE All-Share has had a volatile year. So far this quarter, the index declined by about 3%.
In my view, the near-term outlook for UK shares appears to be bearish. That is if we are to extrapolate the sentiment baked into current prices.
But what about the long term?
If we look at the FTSE All-Share index for the past 20 years, we can see that there have been many ups and downs, some more severe than others. For example, during the Global Financial Crisis, UK shares declined by 45%. For the next 10 years, however, they have climbed higher and higher.
Then again, during 2020, the UK market tanked, alongside other stock markets from across the world. And again it recovered.
When I look at history, what I observe is that negative sentiment is abrupt. The sell-offs are sharp. However, the recovery, both in investor attitudes towards UK shares and in their prices, is more staggered.
Nevertheless, over the long term, the outlook for UK shares has been positive. As such, what does it mean for investors in British companies that the country has yet another new Prime Minster this year?
In the near term, market noise will dictate the fate of the FTSE All-Share market. However, in years to come, if the British economy remains resilient and business-friendly, then I believe that the outlook for UK shares is not that bad.
Ultimately, however, each investor decides for themselves how to read recent political events. When I do so, I prefer to contextualise my views with ample historical data. Why? Because even if history does not repeat itself, it rhymes.
Long-term investors are students of history, as Warren Buffett and his mentor, Benjamin Graham, so often stressed. In practice, this means studying previous market falls during times of uncertainty and asking oneself the following questions:
How quickly did the market decline? How fast did it recover? What event or series of events had led to an improvement in investor sentiment?
