The UK investment landscape is undergoing a noticeable shift, with institutional investors feeling increasingly optimistic about the prospects of their domestic market. This sentiment was captured by a recent survey by Downing, which showed that UK asset allocators feel quite bullish about the next three years, even amid lingering economic uncertainty.

So, how does this sentiment break down amongst different sectors and types of asset allocators? And what themes do they consider to have the most significant impact on their decisions?

Bullish asset allocator sentiment for the next three years

Downing’s survey of 100 UK institutional investors carried out in May 24 – including private defined benefit (DB) and defined contribution (DC) pension plans, public sector pensions, insurance asset managers and family offices – revealed a notable rise in optimism about the UK market.

More than one-third (36%) of investors said their three-year outlook for the UK was significantly bullish, while an added 29% said their outlook was slightly bullish. By comparison, just 24% felt slightly bearish, and significant bearishness was in the single digits at a mere 7%.

Looking at economic indicators, this sentiment may be justified but there are still risks. The latest official data from the Office for National Statistics showed that the consumer price index (CPI) fell to the official Bank of England target of 2% in the year to May – its lowest level in more than three years. Wage growth, too, had slowed, coming in at 5.8% for the private sector from February to April, marking its lowest level in almost two years.

Both of these indicators are being closely watched by the Bank of England (BoE), which may be prompted to cut interest rates in the second half of the year. This would follow the European Central Bank which has already pulled its own trigger. The CPI and jobs market data in the US also suggest a cooling of the inflationary pressures there, with a widely anticipated rate cut in September.

Rate cuts by the BoE would mean cheaper loans for businesses to fund expansion and innovation, while for consumers it would translate to more affordable mortgage and credit rates, especially as an increasing number of fixed rate mortgages are coming up for renewal. This would allow both groups to contribute to spending, economic growth and a more robust investment environment in the UK.

However, there are persistent headwinds, particularly given the stickiness of certain sector indices such as services inflation and manufacturing input costs (exacerbated by the shipping bottlenecks in the Middle East). Experts worry that inflation might bounce back a bit again, which suggests that it will take time for meaningful interest rate reductions to take place.

"Positive asset allocator sentiment swinging behind the UK is further borne out by the comprehensive support for increasing new capital allocations into all UK asset classes and sectors covered in the survey, with 69% of asset allocators stating they would be looking to increase their allocations to the UK in the next three years."

‍Differing levels of optimism‍

Although institutional investor sentiment is positive across all asset allocator types, some appear more bullish than others.

Private pension funds are notably optimistic: 84% of DB providers are either significantly or slightly bullish about the UK market for the next three years. DC providers' outlooks are similarly positive at 77%, with not a single DC fund reporting a significantly bearish outlook.

By contrast, 64% of family offices are either significantly or slightly bullish, with the number reducing further for insurers (60%) and local government pension schemes (56%), all showing a bit more moderate optimism compared to private sector pension schemes.

Attractive UK investment opportunities across the board

Positive asset allocator sentiment swinging behind the UK is further borne out by the comprehensive support for increasing new capital allocations into all UK asset classes and sectors covered in the survey, with 69% of asset allocators stating they would be looking to increase their allocations to the UK in the next three years.

This sentiment covered all asset classes from Credit to Private Equity and Venture Capital. It was also interesting to see significant levels of support for the sectors that Downing is active in within Private Markets, including Renewable Energy, Residential Property and Healthcare.
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With its potential for long-term asset value appreciation, and a market underpinned by entrenched high demand and a supply-side that continues to fall short, it is easy to understand the rationale for institutional appetite for increased exposure into the Residential Property sector. Indeed, investors ranked meeting the increasing demand for UK residential property as the factor they see having the biggest impact on their capital allocations over the next five years.
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Other key factors on investors' radars include alleviating pressures in the UK healthcare system, onshoring UK energy production to increase security around domestic supply and the push for net zero. These factors are all likely to influence portfolio strategies in the short to medium term.

Stability after the July election could unlock further capital deployment‍

Looking ahead, although the outcome of the upcoming general election may be baked in, we still have little information on taxation and spending policies by a new government which, together with a likely loosening monetary policy in the latter half of the year, are likely to have significant influence on any investment decisions made by institutions.

Greater political stability and policy clarity may also unlock delayed investments, resulting in a surge of support by asset allocators for the UK market. It is also interesting to see that asset allocators see the priorities of the future government as quite similar to the factors that influence their allocations, with alleviating the pressures of the healthcare system and meeting the demand for residential property at the top of the list.

“96% of respondents confirmed they are delaying investment strategy decisions until the result of the next general election is known.”

Interestingly, 96% of respondents confirmed they are delaying investment strategy decisions until the result of the next general election is known (with 54% “significantly” and 42% “slightly” delaying investment decisions). This is quite a strong sentiment and is likely to underpin a widespread unlocking of pent-up investment demand post-election, once the dust settles and the horizon is a bit clearer.

The tide seems to be turning for UK allocations and, though challenges remain, asset allocator sentiment toward the market is very encouraging.
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