Markets love clear messages and well-outlined policies, and the current uncertainty about possible Brexit scenarios, coupled with Britain's ongoing domestic political turmoil does the UK equity market no favours. The market remains strongly bearish despite trades forward earnings nearing their cheapest since 2014 as the majority of investors remain cautious and cling to their wallets. Since the year's start, the FTSE 100 Index is trailing other major Western European equity benchmarks, down almost 7 percent compared to only 3.6 percent decline of the Euro Stoxx 50 Index.

Capital outflows from UK-focused funds more than doubled since December, when investors withdrew from the market a total of £202m. According to Bloomberg, the overall sentiment in the equity market now returned to pessimism levels unseen since the height of the last financial crisis. They also quote equity strategists expecting the relative weakness of UK stocks to continue, and forecast in 2018 slower growth for the FTSE 100 than for its European peers.

Bears dominate UK equities market at level unseen since 2009

According to IHS Markit Ltd, bearish bets on stocks in the FTSE 350 Index are on the rise amid the ongoing selloff. As a result, short sellers now account for the largest position in the UK equities market since the first quarter 2009.

Their findings correlate with the latest Investment Association (IA) statistics which showed investors kept ditching UK Equity Funds in January when net retail outflows totalled £532m. Analysts also noticed a slow but steady reduction in fund platforms' dominance throughout the past year. Charles Burbeck, a deputy portfolio manager at UBS Asset Management in London named the still remaining Brexit uncertainty as one of the reasons why the UK funds remain noticeably cheaper than other markets, and he believes that this uncertainty would unlikely disappear within the next year.

Caroline Simmons, deputy head of the UK chief investment office at UBS Wealth Management, noted in February that UBS anticipate the British economy underperforming both the Eurozone and global equities within the next six months.

Weaker pound protecting UK stocks may have reached its limit

The depreciation in sterling triggered by the EU referendum provided a significant boost for investors deriving the majority of their earnings from overseas.

This was particularly the case with the US stocks, given the scale of the pound's fall against its US counterpart. Yet ever since it reached an intraday trade low of $1.18 against the dollar in October 2016, sterling had achieved an impressive recovery, said to be a byproduct of ebbing of 'hard' Brexit fears. The British economy after the referendum has held up better than initially expected, and the Bank of England has reversed its then policy of monetary stimulus. As a result, the weaker pound's tailwind is now expected to become a headwind, causing US dollar earnings decline in value for UK investors. Strategists at JPMorgan Chase & Co. and UBS Group AG have recently questioned the reasoning for a weaker currency protecting British stocks, as the initial boost from a weaker sterling may already have reached its limit.

Investors being urged to reconsider prospects for UK stocks

Despite all this gloom, some analysts quoted by Investment Week see bright signs for the British economy. Laith Khalaf, senior analyst at Hargreaves Lansdown, recently called for investors to reconsider ditching holdings in UK funds, as he questioned the current sentiment when it comes to evaluating prospects for the UK stock market compared to its global peers. Chris Cummings, chief executive of the Investment Association, noticed strong inflows into the economy within the past year, when retail investors allocated £3.7bn and institutional investors £539m into UK authorised funds. His colleague Alastair Wainwright commented on positive inflows in January into the three main asset classes, with fixed income assets leading the way with a £1.6bn net retail inflow, followed by equities with £977m and mixed assets having attracted £941m from new retail investors.