Proof that professional investors are shifting cash to UK shares

Global interest in UK stocks continues to build after Bank of America’s latest survey of fund managers this week highlighted a surge in demand.

Based on responses between 5 July and 11 July, investor allocations to UK equities increased eight percentage points on the previous month to a net position of 4% underweight.

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That’s the highest allocation by investors since July 2022, having been consistently underweight on UK equities since July 2021.

It reflects an improving domestic outlook and attractive valuations relative to Wall Street.

UBS recently switched the UK from least preferred to most preferred in its global strategy, noting a FTSE 100 price/earnings valuation still below the long-run average of 12.8 times.

Overall, global investors remain bullish due to the potential for Federal Reserve interest rate cuts over the next 12 months. They also view a soft landing where growth and inflation gradually ease as the most likely outcome for the world economy.

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Geopolitics has replaced higher inflation as the leading tail risk for the outlook, while investors are more pessimistic on the US economy after 53% said they expect it to weaken.

On US politics, trade policy is viewed as the most likely area to be impacted by the presidential election followed by immigration and geopolitics.

Other changes reported by Bank of America include increased allocations to utilities and reduced allocations to eurozone, commodities, and consumer discretionary stocks.

The report, which gathers responses from 242 fund managers with $632 billion of assets under management, found equity investors are most overweight on healthcare, tech and telecoms.

Unsurprisingly, ownership of so-called Magnificent Seven stocks such as NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT) continues to be regarded as the most crowded trade “by a country mile”.

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The past few Wall Street sessions have seen a rotation away from high-growth stocks, with the small-cap Russell 2000 up 9% since last Thursday whereas the Magnificent Seven is down 7.2% in that time and the Nasdaq off by 3.5%.

While the hopes of a soft landing helped to retain interest in the US technology sector in the survey, Bank of America sounded a note of caution.

It said: “We believe hard-landing risks are underpriced given the slowdown of US consumer, labour market and government spending. This makes us most bullish on bonds and gold in the second half of 2024.”