Sovereign investors snubbing post-Brexit Britain

Sovereign wealth funds and central banks are choosing to invest less in the UK following Brexit, as Germany and the US see a surge in popularity.

The UK's investment attractiveness dropped from scoring 7.5 out of 10 last year to just 5.5 this year, as rated by the 97 sovereign investors and central bank reserve managers surveyed by investment manager Invesco.

Meanwhile, a significant 41 per cent of the respondents intended to underweight UK assets in their portfolio in 2017.

The bleak outlook follows a year of poor performance for the country, with 33 per cent of respondents – higher than in any other region – reporting that they had made fewer new investments to the UK in 2016 compared to their existing portfolio.

However, a slim 54 per cent majority of sovereign investors did not intend to make any changes to their UK weightings over the next year.

“Despite the apparent negative sentiment around the UK, many sovereigns confirmed their long-term commitment to existing UK investments post-Brexit – especially real estate and several high-profile UK infrastructure investments, including Thames Water and Heathrow Airport,” said Alex Millar, head of Europe, Middle East and Africa sovereigns for Invesco.

The study also pointed out that the drop in the value of sterling may have been largely to blame for investment allocation declines, rather than actual withdrawals from the UK.

Germany, meanwhile, shot up the popularity ranks as its investment attractiveness rating ballooned from 7.0 to 7.8 points out of 10 year-on-year.

The country bucked the trend of its neighbours, as investors decreased the percentage of assets under management they had allocated to continental Europe from 12.8 per cent last year to 11.2 per cent.

According to Invesco's analysis, Germany is perceived as a “safe haven” based on its economic strength.

The US also stood out. Whereas Brexit may have been perceived as a negative for investors, the election of President Donald Trump proved to do little to deter commitments to the US.

It was ranked as the most attractive country for the fourth year running, scoring eight out of 10 points.

The US was also the most popular destination in terms of actual allocations, with 37 per cent of sovereigns reporting being overweight in new investments to the region in 2016.

Investors were enticed by rising interest rates and Trump's “pro-business” corporate tax regime, the report said.

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