Is it a good time to invest in the UK stock market?
THIS week, the FTSE 100 index is about to return to its starting point of the year1. This is remarkable, given the concoction of events that investors have had to deal with. The war in Ukraine, the rising cost of living and rising interest rates are just three reasons why we might have expected UK stocks to have done much worse so far in 2022.
It’s not that the UK stock market is insulated from global events. The companies that make up the FTSE 100 derive more than three-quarters of their revenue from overseas2. This means that the index is much more exposed to what is happening in the rest of the world than to national developments.
Key to the market’s resilience so far this year has been its high exposure to both defensive companies – such as pharmaceutical and food producers – and the direct beneficiaries of rising commodity prices – notably oil giants. BP and Shell and miners such as Anglo American and Rio Tinto3.
So, while there are always good reasons to diversify, does the UK deserve to be a mainstay in investors’ portfolios?
Well, the UK stock market certainly remains a good value. The MSCI UK index traded at just 12 times the amount companies are expected to earn over the next year at the end of last month, compared to 17 times for global markets4.
And while investors wait for capital gains to materialize, they are rewarded with an attractive dividend stream. UK companies are currently reporting around 3.7% on a historical basis, and this number could increase as more companies restore payments after the pandemic, although this is not guaranteed.5.
The downside of investing too heavily in the UK is that you risk missing out on some of the world’s best investment opportunities once global sentiment turns and higher risk stocks come back to the fore. fashion.
In particular, the FTSE 100’s very low exposure to the technology sector could prove a drag if the focus shifts back to fast-growing companies.
Of course, investing in an actively managed UK fund gets around this problem. Many UK funds buy shares in mid-sized and small companies as well as constituents of the FTSE 100, providing access to fast growing companies as well as companies with more defensive qualities.
The Artemis UK Select Fund – chosen by Fidelity chief investment officer Tom Stevenson earlier this year as one of his four fund picks for 2022 – is a case in point.
It is a “best ideas” fund, where the largest holdings are those in which the managers believe the most.6.
Currently, the fund has large positions in household names on the FTSE 100 such as Barclays, Shell and Tesco, as well as a large stake in FTSE 250 company Oxford Instruments, a leading provider of high-tech tools for research and the industry.
You probably don’t need to remember that the current fiscal year ends on April 5, which is next Tuesday. You can open or top up an ISA 2021-22 up to or on this date. If you prefer, you can open an ISA now and hold your investment in cash until you decide what to buy.
1 Bloomberg, 03/29/22
2 FTSE Russell, May 2017
3 Bloomberg, 03/29/22
4 MSCI, 28.02.22
5 MSCI, 28.02.22
6 Artemis, 03.28.22