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Are UK investors far too focused on UK assets?


By Darren Sinden, ActivTrades

Writing for the evidence-based investor blog, Benedek Voros, Director of Investment Strategy at S&P Dow Jones indices, made the case that UK investors are far too focused on UK assets, and are not taking advantage of opportunities elsewhere. Mr Voros used graphics like these to make his point.

UK Equity Funds exposure by geography

There is something to his argument, after all, as a nation, the British are often guilty of sticking to what we know, particularly where money is concerned.

But is that necessarily a bad thing?

After all, UK markets are some of the oldest in the world with more than 300 years of history behind them and London remains a pre-eminent financial centre despite what the mainstream media would have us believe post-Brexit.

The FTSE 100 was the best-performing major equity index in 2022 and contained some of the highest-performing assets over those 12 months.

So just what are the attractions of trading and investing in the UK?

FTSE100 Top 5 Constituents

The FTSE 100 is made up of many large multinational companies. Several of which are among the leading lights in their respective industries. These companies hail from a mix of defensive and cyclical sectors. For example, Glaxo SmithKline (GSK) and AstraZeneca are two of the world’s largest pharmaceutical businesses. Whilst Shell (SHEL) and BP (BP) are major players in the energy space, HSBC (HSBA) is a genuine global banking business.

Less is more

The table above gives an overview of the sector weightings within the FTSE 100 index.

Whilst health care, financial services, energy, and, food beverage and tobacco all have high weightings. The technology and Telecoms sectors are at the low end of the scale.

The absence of large technology companies from the index helps to explain the FTSE’s outperformance versus the Nasdaq 100 over the last 12 months.

We can also see a close correlation between the UK blue-chip index and the price of Brent crude oil, over the last two years.

correlation between the FTSE100 index and the price of Brent crude oil

The influence of GBP

Much was made of the weakness of the pound sterling during the Autumn of 2022, as Kwasi Kwartengs budget for growth was roundly rejected by the markets.

But in fact, a weak UK currency typically provides a boost to the FTSE100 index, because 70% of its revenues are earned overseas. Lower exchange rates make those goods and services cheaper to foreign currency buyers. Britain is and is likely to remain an export-led economy.

The FTSE 100 index also contains an 8.16% weighting to the basic resource sector, that’s mining and materials to you and me. If we add that to the Energy sector weighting. that means that almost 20% of the index is made up of companies, which make their living out of natural resources.

That might not sit well with ESG investors but it differentiates the index from its European competitors.

Which by and large have very little if any, exposure to natural resources. A prime example is the German DAX 40 whose sector weightings and exposures are displayed below.

German DAX40 offers little exposure to natural resources stocks

Lower prices preferred

For historical and psychological reasons UK traders and investors prefer to trade low-priced stocks rather than heavyweights. And there are many of them within the FTSE.

Lloyds Bank LON:LLOY which, trades at around 53p, regularly sees daily average trading volumes of some 155 million shares. Vodafone LON:VOD which is priced at 91.6p, turns over 89 million shares on average per day. Whilst mining and commodities trader Glencore LON:GLEN which is priced at 521p, has a 30-day average volume of just under 45 million shares.

By contrast, Shell LON:SHEL which trades at around 2513p turns over just a little more than 11 million shares per day and highly-priced Flutter Entertainment LON:FLTR is lucky to trade 440,000 shares per day.

In summary then, the FTSE100 index contains many world-leading blue-chip stocks drawn from both defensive and cyclical sectors, which are overseas earners.

The index also contains domestic-oriented stocks, many of which have low share prices and are actively traded by UK clients.

London’s position as a leading financial centre and the availability of products such as Contracts for Difference, which allow traders to take long or short positions on FTSE constituents, and indeed the index itself, are a big part of the reason that traders are likely to remain very interested in the UK markets.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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