Surging gas prices, a shortage of food and panic at the petrol stations. If you are following the news closely at the moment you are probably feeling the UK is a gloomy place to be living right now.
But what about when it comes to investing, should we be ignoring the UK and placing our money elsewhere? `
Reasons to be ignoring the UK
In terms of past performance the UK has certainly underperformed the rest of the world over the last 10 years, especially the US.
The most common index used to measure UK stock market performance is the FTSE 100, comprising the 100 largest UK public companies by market capitalisation.
In the chart below we can see how the price performance of the FTSE 100 compares to the MSCI All World global index and the US S&P 500.
As you can see it’s quite a dramatic underperformance by the FTSE 100.
So why is this?
Well, it’s a combination of factors.
To start with we have had Brexit which has resulted in investors avoiding or limiting their exposure to the UK, especially during the period just after the EU referendum result and whilst Brexit negotiations were going on.
But Brexit is only one factor.
The largest UK companies tend to be involved in old fashioned or out of favour industries like banks, energy companies and miners.
These industries are generally stable but not likely to significantly and sharply grow their earnings over time. Unlike in the US where the largest companies tend to be more technology focused and therefore high growth.
Another main factor for UK underperformance is that the UK is only a small part of the global investment landscape.
The image below shows the result of adding the value together of all listed companies in the world and splitting it by where the money is based.
As you can see the UK makes up just 5% of the global investment market. Whereas the US on the other hand is over half.
This is basically saying that investors will allocate a much higher proportion of their wealth to the US compared to the UK.
So, should you ignore the UK as an investment? We would argue no.
Reasons for not ignoring the UK
Whilst the FTSE 100 currently contains many large businesses from older, less growth orientated industries, it is changing.
The FTSE 100 and the FTSE 250 now host more technology companies than at any point since the early 2000s.
The UK actually has lots of smaller firms that are involved in cutting edge technology like Cambridge Quantum Computing who are yet to list on a public market. The next 10 years could be very interesting for UK tech.
In fact, whilst the performance of the larger UK index, the FTSE 100 has not been great compared to the rest of the world, listed UK smaller companies have actually done much better.
If you are not prepared to wait for the high growth UK tech companies of the future then you could still look at the UK market as a more defensive investment.
You see because the FTSE 100 contains lots of large established businesses who are not so focused on growth, they are able to pay dividends. Dividends are a share of the profits paid out to shareholders. Traditionally, the FTSE 100 has paid out around 3%-4% of your investment on average in dividends every year.
So whilst the price of the FTSE 100 has not moved much in the last 10 years compared to the rest of the world, when we add in the return from dividends you can see these form a much bigger part of the overall return compared to the others. Over 65% of the overall return of the FTSE 100 has come from dividends in the last 10 years compared to 16% for the US and 25% for the world.
So if you are someone that prefers to maintain your capital value and live off dividends, the UK could be a good market for you.
Finally, we have to mention currency risk.
If you invest in a market outside of the UK you need the currency of that country to either maintain its value against the UK pound or grow stronger than the pound. If it reduces in value against the pound then this will reduce the gains you get from your investments once the performance is translated into pounds.
So, the more you invest outside the UK, the more you are introducing currency risk into the equation. Not necessarily a problem, you just need to be aware of the risks.
The other side of the currency argument is that as the UK stock market contains lots of international businesses many will have earnings from abroad. So in fact these companies actually want a stronger dollar, Euro etc because when they convert their international earnings back to pounds they will get more pounds for their dollars/euros.
To conclude, we don’t think you should be ignoring the UK as an investment, but we also definitely don’t think you should be over exposed to the UK.
It’s much better to diversify and look at a global portfolio for your investment funds.
The portfolio should also align with your investment goals. So it’s important you know what you need, how to achieve it and how much risk you are willing and able to take.
If you would like your portfolio to be assessed, then please get in touch. We would be happy to provide you with a free portfolio analysis report (usual cost £470) which will break down your portfolio by geographic location, sector and risk level.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
