Could UK assets turn into a value trap?

Buying UK assets could be an attractive option in 2021 but will strongly depend on the result of the Brexit negotiations at the end of this year.  

Brexit negotiations were ongoing but scheduled to be finalised by the end of the year when the UK would leave the European Union (EU). However, there were fears the UK could end up in a worse position if it only achieved a satisfactory deal which was not in the UK’s interests or the UK left the EU under a ‘no-deal scenario’. 

While the UK’s FTSE 100 had seen negative performance since the start of the year, there was hope this would reverse if the uncertainty from an unknown Brexit outcome was removed. The market had lost 16.7% since the start of the year to 11 December versus returns of 2.1% by the ASX 200.  

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Since the leave vote on 23 June, 2016, the FTSE 100 had returned 10.4% versus ASX 200 returns of 50.3%. 

Performance of ASX 200 and FTSE 100 since Brexit vote on 23 June 2016 

 

Chris Iggo, chief investment officer at AXA IM Core Investments, said: “The UK narrative will be how the deal or no-deal plays out for the UK economy and whether the Johnson government can start on a path of fiscal retrenchment. I doubt it personally given domestic politics and the need for the Conservatives to retain the goodwill they were given at December’s election. 

“Buying UK assets could be one of the trades of next year if the uncertainty is lifted but there is the danger of a value trap if it turns out that the new arrangement is, at the margins, worse for the UK than what would have been the case if it had remained in the EU.” 

Another area of interest would be Asia which had emerged from the pandemic earlier and in a stronger position than other regions. There had already been a resurgence of interest by investors for Asian emerging market equities in light of recent market performance. 

“Asia might be a better play for both equities and fixed income given stronger growth, less scarring from the pandemic and higher yields,” Iggo added. 




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