Here's where the experts are investing their cash

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Here's where the experts are investing their cash

Ahead of the snap UK general election one in three financial advisers (33%) believe that UK equities will generate the 'best return' for their clients over a three to five year investment period, according to new research from Aegon UK.

However, there was a notable split in adviser opinions, with a further 16% viewing UK equities as the most overvalued asset class - perhaps a symptom of Brexit uncertainty.

The results come as UK prepares to negotiate its departure from the EU, which has been linked to a decline in Sterling against other currencies, and a return of inflation, which has now breached its 2% target. The results suggest that advisers are on the whole focussed on positive market returns and are optimistic about continued resilience in economic measures such as consumer spending and employment data.

Four months into Trump's presidency, advisers have also signalled a move away from US equities, which have outperformed most equity markets since 2009. Nearly two in five (38%) financial advisers think that US equities are the most over-valued asset class, a sentiment backed by high price to earnings (PE) ratios, a strong dollar and - to quote Warren Buffet's favourite valuation measure - a market cap to GDP ratio that's nearing heights last seen in the US shortly before the Dotcom bubble of 2000 (see chart below).

Quarterly US Market Cap vs. US GDP

Source: Bloomberg, using Free Float Market Cap (S&P 500) divided by US Nominal GDP. 31 March 1997 to 31 December 2016.

After UK equities, emerging markets also proved popular with advisers, having been unloved in the markets for a while, with 20% believing that they will generate the 'best return' over the medium to long term.

In contrast, fixed income has fallen from favour, with just 1% of financial advisers believing corporate bonds and gilts will provide the 'best returns', largely driven by yields that are at historically low rates at the long end of the market, and a rise in inflation.

Which asset class do you think will generate the 'best return' for your clients?

Which asset class do you think is the most 'over valued'?

"Developed markets like the US have outpaced other equities in recent years and now appear to be a victim of their own success with financial advisers turning to alternatives that offer the potential for better returns," says Nick Dixon, investment director at Aegon UK.

"While advisers are pointing towards long-term value in UK equities, the split in their opinions is reflective of continued uncertainty about the longer-term impact of Brexit. A rise in inflation and stunted wage growth signal a warning for financial advisers and demand a higher margin of safety as the volatility of the pound and political strain continue to pose a risk.

"While we too favour UK and European equities over those in the US at present, we are taking a more cautious approach more generally. More broadly markets look fully valued by comparison to historical norms.

"Bonds, which are traditionally used to reduce risk and aid diversification, currently offer very low yields by historical standards, and bonds currently bear elevated capital risk. As a result we have increased cash weightings in our Core and Select Portfolios - an approach that seems prudent when such valuations are prevalent."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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