Economic "lonely beauty", rate cut in sight, institutional buying, is the turning point coming for the UK stock market?

On Wednesday, the July PMI data of various European countries was released intensively. The Eurozone countries collectively encountered difficulties, with Germany's economic sentiment falling below the "boom-bust line" for the first time in four months, and France's economic activity continuing to shrink. Meanwhile, after over three years of Brexit, the UK's economic landscape is thriving, with economic activity maintaining a growth trend for nine consecutive months, and the manufacturing PMI hitting a 24-month high.

The keen market has long sensed the scent of economic recovery. Coupled with lingering rate cut expectations and the increasing political stability post-election, institutional investors are preparing for the UK stock market to emerge from the "cold palace." The UK stock market has lagged behind the Eurozone and US stock markets for many years, and its current valuation is seen as more attractive by investors.

According to media reports on Wednesday, international capital giants including BlackRock and Allianz, as well as UK-based fund giants like Ruffer and Rathbones, have increased their exposure to the UK stock market in recent months.

Based on fund flow data from Bank of America, since May, its institutional clients have shifted from net selling to net buying in the UK stock market—reversing the long-standing outflow trend.

Furthermore, Morningstar data shows that UK mid-cap stocks have seen inflows for three consecutive months, the first time since November 2022. UK mid-cap stocks are closely related to the UK economic outlook.

Rebecca Maclean, Investment Director at Standard Life Investments, pointed out that the decline in inflation and the overwhelming victory of the Labour Party in the election will bring about an optimistic period of stable government.

The narrative in the UK has undergone a significant transformation.

Eight years after the Brexit referendum, is the UK stock market finally turning a corner?

Since the Brexit referendum in 2016, the UK stock market has experienced an exceptionally difficult eight years.

Both professional institutional investors and retail investors have generally shied away, with listed companies continuously leaving the UK stock market, exacerbating investors' anxiety about the future of the City of London. Over these eight years, some investors have been attracted to the cheap assets in the UK stock market, but most have left empty-handed.

Media data shows that over the past five years, the FTSE 100 index has returned 30%, significantly lower than the 45% return of the European benchmark STOXX 600 index and a staggering 94% return of the S&P 500 index.

Now, more and more signs indicate that the UK stock market may be starting to recover. French media group Vivendi announced this week its plans to list its French TV subsidiary Canal+ on the London Stock Exchange.

London-based Ruffer has doubled its exposure to UK stocks from 5% to nearly 10% in the past few months. Ruffer fund manager Alexander Chartres stated:

In the UK, valuations are attractive, and the new government brings more political stability—it's an interesting place.

The world's largest asset management company BlackRock (managing assets of $10.6 trillion) shifted to overweight UK stocks in early July. BlackRock Investment Research Institute's Chief Investment Strategist in the UK, Vivek Paul, compared the UK to France and believes that compared to France, the UK's political environment is more stable.

Although UK stock valuations are significantly attractive, we lack catalysts for overweighting. However, the potential of a more stable political environment compensates for this.

James Thomson, manager of the £4 billion Rathbone Global Opportunities Fund, stated that his current allocation to UK stocks (6%) is at its highest level since 2016.

(The UK) is no longer an outlier politically or economically, and inflation has returned to target levels.

The pound is the strongest performing G10 currency this year and is about to benefit from a series of rate cuts.

The pound has risen by 1.5% against the US dollar year-to-date, with a nearly 2% increase in the past month alone.

Pound Strength Suppresses Stock Market Enthusiasm, Retail Investors Remain Pessimistic

Although investors are more interested in the UK market, this interest has not directly translated into a significant increase in the stock market due to the strength of the pound.

The FTSE 100 index in the UK has risen by 5.7% year-to-date, lower than the 7.4% increase in the STOXX 600 index in Europe and the 17.1% increase in the S&P 500 index.

Meanwhile, retail investors continue to sell UK stock funds, with nearly £1.8 billion withdrawn in May - setting a monthly record. According to the Investment Association, retail investors have withdrawn approximately £54 billion from the UK stock market since 2016.

Nevertheless, fund managers believe that despite not experiencing a full recovery, the negative sentiment surrounding the UK market has prepared it for a period of catching up with overseas markets.

Simon Gergel, Chief Investment Officer for the UK at Allianz Global Investors, stated:

The view that the UK is the "sick man of Europe" has not been confirmed