British investments haven’t lost their lustre

The UK stock market and British investments seemingly don’t shine as brightly as they used to. Fund buyers appear to have fallen out of love with UK investments. But there’s a strong case for sticking with the UK, for at least a portion of your globally diversified, index tracked, investment portfolio, as we explain below.

Global Britain?

It’s long been said that an investment in the FTSE100 is an investment in the world.

Global banks, international oil majors, mining companies with operations far from these shores … the list goes on. Not for nothing did recent analysis say 82% of these companies’ revenues are international.

It’s a prime reason for British investments: tapping into positive, international market forces.

For example, our portfolios at First Wealth have a healthy slug of UK shares (for this and other reasons) alongside, say, the 60% we allocate to shares in American companies.

But if you pull the camera lens back from just the biggest companies, British investments appear to be in the doldrums.

UK market woe

The Daily Telegraph is rarely high on a list of Brexit critics. But earlier this year it pinpointed the UK’s departure from the EU as the “prime suspect in the death of the stock market”.

Last year just 23 companies listed on the London Stock Exchange – 49% fewer than 2022 – and they raised a mere £954m (2022: £1.6bn). In the fourth quarter of 2023, there were no listings at all.

That’s remarkable. Especially when you find out that 2023 was a 90% fall from 2021. The data around the world are mainly down, but not by nearly as much as the UK.

If companies don’t think London is the place to tap into the world’s investors, what does this say about the British investments environment?

Not much … according to UK fund buyers.

Voting with their money

Data compiled by the UK investment trade body show that the worst selling fund sector for each of the last 13 months has been “UK All Companies”.

Fund buyers have instead preferred government bonds and cash. These lower risk investments offer commensurately lower returns. For example, lend your money to the UK government for 10 years (through a 10-year gilt) and you’ll get a yield of 3.9%. With inflation at 4.2%, this’ll lose you money each year.

Naturally, we think the long-term argument for shares remains valid. We are, after all, evidence-based investors. And academic evidence says that long-term allocations to passively managed shares have the best chance of achieving the optimal returns required by our clients.

All roads lead to … London?

Over the years we’ve had to make the case to clients they should allocate to international markets – hence that 60% in American companies I referenced earlier.

But now, with a cost-of-living crisis, a recession and a stock market that underperformed its competitors in 2023, we’re sometimes in the unusual situation of making the case for domestic investments.

It goes something like this:

• Attractive total returns over the long run. Recent analysis shows that, over the last 119 years, the FTSE100 has made annualised returns of 4.9% above inflation.
• Some argue that UK equities are relative cheap. In other words, the shares prices of UK-listed companies sit below those of other markets and also where the technical data suggest they could be.
• The UK corporate sector is innovative. The Global Innovation Index 2023 ranks the UK fourth in the world. It might sit behind the US and Sweden but it’s comfortably ahead of, say, Germany and Japan.
• UK companies tend to pay decent dividends. The average for the FTSE100 is 3.78% and the FTSE250 3.40%. Okay, that’s below current inflation, but it’s worth remembering that dividends are just a portion of total returns from shares. Much of the money you can make comes from long-term share-price appreciation. Add all that together and you can start to arrive at some healthy numbers above inflation.
• There are more incentives to invest in the UK. In the March budget, Jeremy Hunt unveiled plans for a UK ISA, which means you can shield an extra £5,000 from tax. The details are to follow.

Yes, the UK market has been in the doldrums since 2016. Yes, it was battered by the pandemic worse than other markets. But evidence suggests British investments should not be written off as part of a globally diversified, evidence based investing portfolio.

If you’d like to discuss your investments, please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://content.ftserussell.com/blogs/overseas-revenues-boon-ftse-100-performance

[2] https://www.telegraph.co.uk/business/2024/01/13/brexit-prime-suspect-death-london-stock-market/#:~:text=The%20London%20stock%20market%2C%20a,arms%20of%20private%20equity%20buyers.

[3] https://www.ey.com/en_uk/news/2024/01/london-stock-market-ipo-proceeds-fell-40-percentage-in-2023

[4] https://www.ey.com/en_uk/news/2023/01/challenging-2022-for-london-stock-markets-as-proceeds-fall-by-90

[5] https://www.theia.org/industry-data/fund-statistics/statistics-by-sector/25

[6] https://tradingeconomics.com/united-kingdom/government-bond-yield#:~:text=The%20UK%2010%20Year%20Gilt%20Bond%20Yield%20is%20expected%20to,4.03%20in%2012%20months%20time

[7] https://www.ons.gov.uk/economy/inflationandpriceindices

[8] https://www.reuters.com/world/uk/uk-economy-entered-recession-second-half-2023-2024-02-15/

[9] https://www.theguardian.com/business/2023/dec/29/ftse-100-up-but-europe-us-uk-wall-street-sp-500

[10] https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100–230511#:~:text=Over%20the%20last%20119%20years,returns%20to%20be%20around%207.5%25.

[11] https://www.schroders.com/en-gb/uk/intermediary/insights/six-charts-that-show-just-how-cheap-uk-equities-are/

[12] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.wipo.int/edocs/pubdocs/en/wipo-pub-2000-2023-section1-en-gii-2023-at-a-glance-global-innovation-index-2023.pdf

[13] https://www.dividenddata.co.uk/dividendyield.py?market=ftse250&sort=yield&order=1

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.