Should you invest in the UK?

Published by Rob Griffin on 02 June 2015.
Last updated on 02 June 2015

Union Jack

After slumping during the financial crisis, the blue-chip FTSE 100 index of leading companies had soared to a record high of 7103.98 points in April 2015.

As well as lifting the value of investments and making the longer-term savings pots of millions of people look a lot more attractive, the increase has also given a boost to the economy as people spend more when they feel wealthier.

This was illustrated in the wake of the General Election. On the day the Conservatives won a slim majority, the FTSE 100 rose 2.3%, while the more domestically focused FTSE 250 went up 2.8%. Energy companies, house builders and banks enjoyed particularly big gains.

Laith Khalaf, senior analyst at Hargreaves Lansdown, suggested the feared 'fall-out Friday' had turned into 'fabulous Friday' for markets. "The election result means we don't face weeks of political wrangling, which was positive for most stocks," he said.

The pound also rallied strongly, while yields of UK government bonds fell, indicating a vote of confidence in the UK economy, according to Gavin Haynes, managing director of Whitechurch Securities.

"There is little doubt that UK stockmarkets, currency and bond markets would not have responded well to the uncertainty of a hung parliament," he said. "The returning of a Conservative government with a working majority, albeit a slim one, will undoubtedly lead to an increase in investor confidence."

The risks

However, that doesn't mean investing in UK shares is without risk. Stockmarkets may have risen a long way since the dark days but at some point they will fall. It's just a question of when and by how much.

The most popular way of buying into the UK market is through a fund in the IMA All Companies sector. Around £163 billion is currently held in this area, equating to 16.8% of the £974 billion total held in UK- authorised funds, according to the Investment Association.

An investment in this sector should be considered by anyone who believes in the benefits of a broadly diversified portfolio or who expects the UK stockmarket to rise in value over the next few years.

However, a very common misconception is that the fortunes of funds in this area depend on the prospects for the domestic economy. But this is certainly not the case, according to Patrick Connolly, a certified financial planner with Chase de Vere.

The reality is that many of the companies it invests in are likely to be more affected by global issues.This is due to them being multinational in nature and deriving substantial income from overseas markets, despite their stockmarket listing being in London.

In fact, Connolly points out, of the companies in the FTSE-100 Index, only 23% of revenue is generated in the UK, with 27% coming from Europe, 24% from North America, 15% from emerging markets, and the remainder from the rest of the world.

"It is possible to get more exposure to the UK economy by investing in smaller companies, which are likely to derive more of their income from the UK by investing in funds in the UK smaller companies sector," he says. "Even for those companies that do all of their business in the UK, their share price will still be moved by general market sentiment driven by events that happen in Europe, the US, emerging markets and the Middle East."

Another misconception is that all funds will be the same. While all must invest at least 80% of their assets in UK equities with a primary objective of capital growth, investment philosophies and management styles will vary enormously.

Some focus on the largest blue-chip names, while others will concentrate their attention on small- or mid-cap names.Then you have those with ethical objectives, portfolios that simply track the stockmarket and funds that buy companies that are out of favour.

Therefore, those wanting exposure to the UK stockmarket must consider a number of questions. For example, are the blue-chip FTSE 100 giants undervalued and will the mid-cap names deliver the best returns over the coming years?

James Bateman, head of portfolio management at Fidelity Solutions, believes it's important that investors don't get preoccupied with the impact of the General Election on their investments, and think longer term.

"It may seem extremely important now but it is simply another bump in the road," he says. "We believe that spreading a portfolio across asset classes, global regions and sectors can help to diversify risk and lower volatility overall."


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