Presently, it may not feel like there are many advantages to being a UK investor. The UK may be facing a recession until 2024 (if the Bank of England is correct), the British pound has fallen to record lows against the US dollar, and the FTSE 100 has been fairly stagnant over the last twelve months. Yet there are reasons to be very positive about being a UK investor, despite the present challenges. Below, our Teesside financial planners explain these advantages in more detail and how you can use them to benefit a portfolio.
The historic strength of the pound
Imagine the year is 1980 and there are two investors, one based in the US and the other in the UK. The first invests $1 US in the S&P 500 and the second invests £1 into the same. This investor would need to convert his £1 into USD, which at the time could have turned into $2.46. The US investor, naturally, just invests his $1 (no conversion required). If we look at how these investments into the S&P 500 would look today, the UK investor may have $203 US which he can then convert into £178. The US investor, conversely, could sell her investment for closer to $83. The former investor received a currency boost, whilst the latter did not. Indeed, if these returns are annualised, then the UK investor achieved 13.1% whilst the US investor 11.1%.
How did the UK investor achieve this extra 2% return? The answer: currency movements. If you look at the value of the GBP (British pound) versus the USD in the early 1980s, there was a sharp fall in the value of the former against the latter. This is partly due to the surging strength of the dollar (26% appreciation) due to tight US monetary policy between 1980-84. A similar thing is happening today in 2022. The GBP has weakened over 10% against the dollar since the start of the year, partly due to investor fears over the UK’s Mini-Budget in September but also due to rising US dollar strength (as the Federal Reserve has tightened monetary policy).
During such times, it is tempting for UK investors to see such events negatively. In fact, a falling GBP can be good news for the globally-diversified investor. This is because their foreign assets are likely to rise in value (e.g. those held in US dollars, Euros, Canadian dollars, Australian dollars, Swiss francs, or the Japanese yen), amplifying returns when they are converted back into sterling. In 2022, there has also been a “hedging effect” for UK investors who may have invested into the US stock market. Many people have been talking about a “bear market” in US stocks since the start of 2022, with the NASDAQ index falling over 34% since January. Yet for UK investors, this has been cancelled out to a large extent by the rising strength of the US dollar versus the GBP. So, whilst US investors may have seen high nominal losses in their domestic holdings in 2022, UK investors into US stocks have likely not nearly been hit so badly in real terms.
A “cheap” and unique domestic stock market
Some UK investors may be put off by the performance of the FTSE 100 (a core UK index) in recent years. Between 2007 and 2022, for instance, the index has barely climbed 500 points from 6,690.10. Yet there is still strong price growth potential in many UK stocks, and these are widely priced very “cheaply” compared to many other international markets. The forward price to earnings (P/E) ratio is currently around 15.6 in the USA (meaning that investors are prepared to pay over $15 for every $1 of profit), whilst in the UK it is 8.62 – lower even than Germany at 9.1. UK equities are currently widely “unloved”, but when investors buy stocks that are undervalued it can boost their long-term return if (or when) these fall back into favour with the market.
Another benefit of the UK’s stock market is that it contains a lot of companies which offer a high dividend yield. For investors seeking a regular income from their portfolio, therefore, the UK is often an attractive choice. The UK also offers a very unique stock market which provides more options for investors to diversify their holdings. In the USA, for instance, information technology (IT) comprises nearly 27% of its stock market. The UK stock market, by contrast, comprises just 1% IT stocks but a larger share of consumer staples (21% compared to 6.6% in the USA; e.g. supermarkets) and energy (nearly 15% compared to 4.62% in the USA). These UK sectors are widely regarded as at – or under – fair value (perhaps for good reason), but conversely the US “mega tech stocks” which have driven much of the stock market growth in recent years are now seen as very expensive. Who knows, perhaps the UK could see a turn of fortunes in the years ahead as it settles into Brexit, recovers from the pandemic and finds its way through the energy crisis (especially now that the era of “cheap money” and low interest rates seems to be coming to a close)? Whilst much negativity currently surrounds the UK, this could be precisely the time for savvy investors to give it some attention.
Invitation
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