Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THIS week, the FTSE 100 Index is just about back to where it started the year1. That’s remarkable, given the concoction of events investors have been required to contend with. The war in Ukraine, increased living costs and rising interest rates are just three reasons we might have expected UK shares to have done a lot worse so far in 2022.
It’s not that the UK stock market is insulated from world events. The companies that make up the FTSE 100 derive more than three quarters of their earnings from overseas2. That means the Index is much more exposed to what happens in the rest of the world than developments at home.
Key to the resilience of the market so far this year has been its high exposure to both defensive businesses – such as pharmaceuticals and food producers – and direct beneficiaries of rising commodity prices – notably the oil giants BP and Shell and miners such as Anglo American and Rio Tinto3.
So while there is always a good case to diversify, does the UK deserve to be a mainstay of investors’ portfolios?
Well, the UK stock market certainly remains good value. The MSCI United Kingdom Index traded on just 12 times the amount companies are expected to make over the next year at the end of last month, compared with 17 times for world markets4.
And while investors are waiting for capital gains to come good, they are being rewarded with an attractive dividend stream. UK companies currently yield about 3.7% on an historic basis, and that number could rise as more companies reinstate payouts after the pandemic, although this is not guaranteed5.
The downside to investing too heavily in the UK is that you may miss out on some of the world’s best investment opportunities once global sentiment turns and higher risk shares return to fashion.
In particular, the FTSE 100’s very low exposure to the technology sector could prove a drag should the focus return to fast growing businesses.
Of course, investing in an actively managed UK fund gets round this. Many UK funds buy shares in medium and smaller sized companies as well as FTSE 100 constituents, thereby offering access to rapidly growing businesses as well as companies with more defensive qualities.
This is a “best ideas” fund, where the largest holdings are those in which the managers have the highest levels of belief6.
Currently the fund has large positions in familiar FTSE 100 names like Barclays, Shell and Tesco alongside a large holding in the FTSE 250 company Oxford Instruments, a leading provider of high-tech tools for research and industry.
You probably don’t need reminding that the current tax year ends on 5 April – that’s next Tuesday. You can open or top up a 2021-22 ISA up to or on that date. If you prefer, you can open an ISA now and hold your investment in cash until you decide what to buy.
1 Bloomberg, 29.03.22
2 FTSE Russell, May 2017
3 Bloomberg, 29.03.22
4 MSCI, 28.02.22
5 MSCI, 28.02.22
6 Artemis, 28.03.22
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Tax treatment depends on individual circumstances and all tax rules may change in the future. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
Share this article