Jamie Black, partner & head of private clients at Sarasin & Partners, explains why UK investors are losing out if they keep their portfolios focused on the UK market.
Prior to voting on EU membership, the UK had emerged as one of the world’s strongest economies from the global financial crisis. Since then Brexit has divided opinion about the immediate prospects for the domestic economy and the currency too.
Thus far at least, the economy is confounding the sceptics, but the pound has been an obvious victim of Brexit, falling sharply against all major currencies. The impact of weaker sterling affects everyone in different ways, depending on whether you are an importer or exporter of goods and services, or reliant on seasonal foreign labour in the agriculture sector for example; most noticeably it has resulted in rising inflation, which is likely to hit UK consumers across the board in 2017 (witness the Marmite war between Tesco and Unilever).
One thing we can be sure about, however, is that sterling’s demise will have had a correspondingly positive impact on the value of overseas shares in your investment portfolio (the value of a share priced in US dollars, for example, has enjoyed a boost of around 15 per cent since 23 June from the currency impact alone, when translated back into sterling).
These developments should be encouraging anyone with a UK-centric investment portfolio to ask themselves whether and why their portfolio needs to be wedded to the UK stock market.
But why does any of this really matter from an investment perspective? First and foremost because it has re-emphasised the UK stock market’s very significant concentration risk across a few sectors, e.g. too much in financials and energy, against far too little in technology (less than 1 per cent!), not to mention its stock-specific risk with the 10 biggest companies listed on the London Exchange representing more than one third of its total value.
Looking at it another way from across the pond, the combined value of the six biggest companies quoted in America is greater than the entire UK stock market. Furthermore, most of the world’s largest companies now generate a significant proportion of their revenues in overseas markets; hence the location of their stock market listing has become increasingly irrelevant in terms of assessing future growth potential.
Income risk is also significant, with two thirds of all UK dividends currently being paid by just 20 companies. Remember the catastrophic collapse in income suffered by UK equity portfolios when the banks slashed their dividends in 2008/09 after the financial crisis.
After the banks’ debacle, Royal Dutch Shell and BP found themselves paying a staggering 24 per cent of all UK dividends, until BP’s disaster in the Gulf of Mexico, which forced it to suspend dividends for a year before resuming with a reduced payout in 2011.
GO GLOBAL FOR MORE DIVERSIFICATION
So why limit your equity exposure to the domestic stock market, when the UK now represents less than 6 per cent of the World Equity Index? The simple answer is that you shouldn’t. In our view, a truly global outlook is a better option for your financial wellbeing, bringing a wealth of diversification, dividend and growth opportunities, which the UK stock market simply cannot compete with.
The traditional investment approach for private wealth in the UK has been to focus the majority of equity exposure in the domestic UK index, with some overseas positions around the edges.
We would argue that for portfolios still stuck in a UK rut, the events of the last 12 months have re-emphasised the argument for tipping the scales in favour of a genuinely global approach, giving access to the best in class companies across all industries, regardless of where they are located or quoted.
Global and thematic stock selection has been the bedrock of our approach at Sarasin since the mid-90s. We realised then that the trend towards globalisation, along with technological and demographic changes, would all become significant drivers of investment returns. The evidence of the last 20 years has strengthened our conviction, with Brexit and the demise of sterling reinforcing the point.
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