The UK economy's road to recovery will be arduous but do not write off its equity market, says Nathan Sweeney, investment manager at Architas.
As a means of diversifying, investors and advisers alike have been pursuing investment opportunities across the globe. However, with headlines reminding us daily of the plight of the global economy and the slow, painful road to recovery, I wonder whether managers should be so hasty to overlook the UK stock market in favour of international companies.
Sure, UK equities do not represent a trouble-free oasis of investing but, with the correct approach and an awareness of the possible pitfalls, they can provide lucrative opportunities.
The UK stock market offers convenient access to global economies: according to BNP Paribas analysts, 80% of all earnings by FTSE 100 companies come from abroad. This means UK investors can achieve some of the diversification potential of multi- regional exposure via their domestic market.
In light of the recent sterling weakening, UK large-cap investors stand to benefit in particular, as gains made abroad will be worth more when converted back to sterling. This global exposure is particularly attractive given that the UK stock market is one of the most defensive in the world.
Whereas US and European markets, for example, have a bias to cyclical sectors (technology and industrials respectively), the FTSE 100 has a defensive bias, with above average exposure to, for instance, pharmaceutical and tobacco stocks.
In addition, the UK stock market is a highly liquid marketplace, so investors can access foreign economies with a greater degree of protection and flexibility.
Meanwhile, UK stocks deliver some of the best yields. This is no coincidence considering defensive companies are better placed to maintain stable and attractive dividends rather than more aggressive companies which use their earnings to invest in future growth.
The top ten largest companies in the FTSE 100 all pay a dividend and the dividend yield of the index as a whole is currently 3.5%. Even better, within the IMA UK Equity Income sector, funds are delivering yields of up to 8%.
Contrast this with the MSCI World index, which is currently yielding more in the region of 2.7% and it is clear that, in today’s hot pursuit of yield, UK equities offer an attractive opportunity.
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