2023 has seen UK equities fall behind again in terms of returns and it continues to be widely publicised that the UK equity market has become a global backwater, with companies and investors lacking vibrancy. However, if you look more closely, there remain important features of durability which should continue to keep capital flowing in.
In terms of positives for the UK, it looks to be in a good place in terms of property rights and rule of law, the political system allows governments and leaders to operate relatively well, the Treasury has a solid track record of collecting taxes, and there are also time-zone and location benefits.
Why is it important?
The long-term health of the UK is key when it comes to investment portfolios. When considering the blend of an investment portfolio for UK-based investors and those likely to have liabilities in sterling, investing in the domestic market can often help to reduce currency risk, cost and tax.
Many assume that companies listed in the UK are priced in pound sterling and therefore are excluded from currency risk, however this is not necessarily the case. Revenues and cost bases are often global in nature and profitability can be dictated by the performance of the pound. Any weakness could be down to a tailwind for those generating revenues in another currency, and the other way round. This could potentially have a serious impact on those with large cost bases in the UK.
Measuring and managing the translation effect is virtually impossible given the huge number of factors impacting company accounts, and the fact that accounts are only ever a ‘point-in-time’ snapshot of activity provides an extra complication. At least by having a home bias, it provides a degree of reduced currency risk and diversification.
When it comes to tax, this is essentially about the treaty status between the UK and the country of domicile, where the dividends or interest payments originate. In relation to withholding tax, this is taken at source and dividends coming from US-listed investments, for example, would be levied at 30% for UK investors. This could be reduced by a series of forms and reclaims but can act as a drag on performance for both active and passive investments. Although relatively small given some markets are not focused on dividends, this barrier to return can give the UK market an advantage for UK investors.
The nooks of the matter are that we continue to believe in a well-diversified portfolio which helps us manage volatility and medium-long term performance. If we exit from certain equity markets, we miss out on the upturns too. This is depicted in the below graph which highlights the value as at 31/12/21 of a £10,000 investment being placed in 1981, in various scenarios.
Inflation is high and interest rates have been ascending, but this isn’t just a story for the UK, this is happening all around Europe.
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The value of investments can fall as well as rise. You may not get back what you invest.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.