The Bank of England estimates that Britons are sitting on £100 billion of excess savings due to lockdowns. Almost three-quarters of people say they aren’t going to spend their extra cash and are presumably going to put it to work. For those investing for a better financial future, there is a strong case to be made for buying British – that is, upping their exposure to UK equities.
Investors would certainly be in good company if they did. BNY Mellon has noted a marked shift into UK assets by global fund managers, which began last year and shows no sign of abating. Tellingly, Exchange-Traded Funds replicating UK indices are booming too and momentum is only going to grow, according to many investment experts.
This is a real comeback after years of widespread underweights. The UK market became very much unloved following 2016’s Brexit decision and although there are still certainly strained relations with the EU, our Christmas Eve trade deal has calmed investors’ nerves hugely. They are also clearly noting our phenomenal vaccine success contrasted against the worsening crisis and business-unfriendly histrionics seen, ahem, elsewhere.
Potential for an early and dramatic economic recovery and the reduction (if not removal) of political risk are big draws. But actually, there is a lot more to recommend the UK market besides these factors.
Value, safety and growth
First is that the earlier mentioned falling out of love caused UK equities to become the least expensive of developed markets, to the point of the FTSE 100 showing its highest valuation discount level in over two decades. Such was fear of a hard Brexit that in the years after the referendum the FTSE 250 underperformed the MSCI World Index by almost 60% after comfortably beating it for many years before. In short, discounts have been deep and I would argue very much based on fear rather than fundamentals. This is, of course, how value is found.
Second, as Reyl & Cie recently noted, UK stocks have the highest dividend yield of any market at 3.8%, alongside the highest earnings per share growth expectations in the world, at 49% for 2021. At a time when even the most faithful payers have been slashing dividends and a lot of economic pain has yet to play out on corporate balance sheets, you could say the UK has started to look like a safe haven and a growth play simultaneously.
Financials and commodities
Projections for the UK market are very much influenced by its constituents, in which commodities and financial services have tended to have a starring role and account for about a fifth of exposure each currently. If inflation is around the corner, as many believe, commodities are poised to do well as the two are pretty well correlated (and likely will anyway due to a post-pandemic energy consumption and infrastructure boom). And, if interest rates are upped, banks are the natural beneficiaries.
There could also be a significant shake-up in the composition of the FTSE from heightened M&A activity and a slew of companies looking to list in London. One to watch is Deliveroo’s IPO in a week or so, which is expected to deliver a valuation of £8.8bn and become the LSE’s biggest float in a decade.
A convincing case (with caveats)
Naturally, there are caveats. The UK markets have been leading the way in year-to-date gains meaning that they might not be quite so bargainous for long. The earnings of FTSE-listed multinationals could also be hit by the strength of sterling, which has soared against both the US dollar and euro and could rise further off the back of reflation.
There is also concern that our vaccine head start isn’t being capitalised on enough by keeping the country in lockdown despite Covid data being very much better than expected. We aren’t out of the woods yet, although our path to freedom is undoubtedly more brightly lit.
Fund flow data shows investors are largely brushing such concerns aside, however. While a well-diversified portfolio should always be your aim, there are some very convincing reasons why you might want to consider upping your exposure to UK equities. If that means putting excess cash to use that would otherwise be languishing on deposit at rock-bottom rates, then so much the better.