It is a disturbing time for UK investors. Headlines about the UK economy – now one of the worst-performing among the world’s major markets – are increasingly negative.
A few years ago Britain ranked as one of the fastest-growing of the major economies. Today it is ranked the worst performing on a number of key measures.
The ongoing process of Brexit, with new crises and disputes emerging daily, adds further to political and economic uncertainty.
As a result, many investors are reducing their exposure to the UK stock market.
Bob Hair, wealth planning director of wealth management firm Cazenove Capital in Edinburgh, believes that investors now need to broaden their horizons beyond the UK.
He argues that this is not especially about Brexit, but about the fact that many overseas markets offer potential for more attractive returns. A wider spread of holdings also reduces risk.
“A balanced portfolio for a UK investor 25 years ago would probably have entailed investing 90% in UK shares and 10% in government bonds,” he said.
“Today, we look at equities from a global perspective and we do the same with bonds and other asset classes. We are trying to diversify and get a stable return for investors.”
He argues that while the British economy might be battling, others are in rude health. Globally, it is emerging markets in Africa and Asia which are showing the biggest leaps in GDP; but countries like Japan, which has struggled in recent years, are also improving.
“Even where people are focusing on preserving the value of what they have got, it is all about diversification.”
There are other reasons to invest in overseas assets
The UK’s stock market – while remaining one of the largest and busiest in the world – has its limitations. Investors who restrict themselves to primarily UK shares will find they lack exposure to certain, important sectors. They may also risk having too much exposure to others.
Bob Hair points out that in the US the astonishing growth of “giant tech” – companies such as Facebook, Amazon, Netflix and Google – means that today the technology sector accounts for 23% of the value of the S&P 500 index.
In Britain tech companies are poorly represented: the comparable figure for the FTSE 100 index of leading UK stocks is approximately 1%.
Cazenove Capital’s current view is that equities in Asia and Japan and other emerging markets offer potential. There is a neutral view on US and European shares and a cautious approach to the UK, primarily because of the uncertainties posed by Brexit.
Cazenove, which manages portfolios for individuals as well as charities, also favours certain types of overseas bonds. At the same time it sees benefits in holding other assets including gold and cash, which tend to behave very differently from shares and bonds and which can offer protection in periods of volatility.
But have overseas assets become too expensive?
A common way in which companies are valued is to compare their share prices with their earnings. Bob Hair acknowledges that on this basis, valuations in some markets are very high. But because many businesses are benefiting from increased profits as their local economies recover, valuations are not necessarily reaching levels of concern.
“There are still plenty of opportunities out there,” he said.