A new survey of wealth managers by fund provider Jupiter has found Brexit and global growth fears are undermining positive sentiment.
According to their survey, Brexit is a concern for more than 70% of wealth managers.
Over half are worried about a slowdown in global economic growth and geopolitical uncertainty.
With the first third of 2016 complete, Jupiter found that positive sentiment among UK wealth managers on the outlook for the UK market remains muted at best amid concern the country faces a maelstrom of economic headwinds that could derail growth.
The Jupiter Wealth Manager Index, which was published recently for the first time, is designed to track wealth manager sentiment using an easy to read scale of -20 to +20.
The first edition found investment professionals are exhibiting only ‘weak positive sentiment’ on the prospects for the UK market, with a reading of just +2.
The index, which is the result of a survey of over 150 managers representing assets under management of over $2 trillion, aims to capture the outlook, attitudes and perspectives of the markets by rolling up the collective views of these managers towards ten key FTSE sectors.
Jupiter found that external concerns such as the country’s continued membership of the European Union, weak global growth and geopolitical instability have combined with internal fears over dividends, the banking sector, house prices and low productivity to create uncertainty among wealth managers over the UK economy.
This lack of certainty, according to wealth managers, means managing risk and volatility are increasingly likely to become the cornerstone of their portfolio construction over the next 12 months, reflecting a more defensive footing and the difficulty of allocating assets in such an uncertain climate.
The EU referendum was found to be the most prominent risk factor to the UK’s growth outlook in 2016, with over 70% of wealth managers citing it as a major worry.
There are strong concerns among wealth managers that a vote to break away from the EU (commonly referred to as a ‘Brexit’) would result in foreign investors questioning their exposure to the UK economy and UK assets.
Jupiter said that this in turn could lead to an increase in bank funding costs which could be passed to UK consumers through tightening credit conditions.
On a sector-by-sector basis, wealth managers hold very different opinions on the prospects for the oil and gas and financials sectors, both of which contain some of the biggest dividend payers in the UK.
Over half of wealth managers believe UK bank valuations are currently underpriced by the market even though over half of them think the sector could see further negative shocks over the next six months.
There is more consensus however that the consumer goods and services sectors are likely to have a good year.
The healthcare sector is another sector that wealth managers continue to favour, recognising its classic defensive qualities as a safe investment option.
Against this background, wealth managers believe adaptability is likely to be key to investing this year in a cycle favouring stock pickers.
For them, the UK still has a lot of advantages making it an attractive investment destination including a strong services sector, modest wage growth and low unemployment.
At the same time, managers worry that there are few if any areas of the UK stock market that can act as a refuge in these uncertain times, prompting many to focus their efforts on unearthing fund managers with a genuine ability to stock pick and deliver returns over and above the market, providing a key driver for potential outperformance in the future.