How differentiated information leads to a stronger financial portfolio

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In recent years, UK stocks have traded at a relative discount to other developed markets. Much of this was due to the ongoing Brexit negotiations, where uncertainty surrounding trade deals and other legislation created significant headwinds.

Fast forward to today, and much of the uncertainty has passed. Does this mean it’s time to invest in the UK?

Look ahead

This infographic from BlackRock covers four reasons why investors should consider an allocation to UK stocks.

So why should investors consider an allocation to UK equities?

# 1: The UK market is not the UK economy

The UK stock market is represented by many leading multinational companies in various industries.

For example, consider the FTSE All-Share Index, which contains more than 600 companies listed on the London Stock Exchange. As of March 31, 2021, 72.5% of the total turnover of these companies came from outside the UK.

Much of the overseas income provides investors with exposure to a range of global themes, where results are not dictated by the UK economy itself.

# 2: Commercial activity intensifies

The confirmation of a Brexit trade deal has provided UK businesses with clarity on the rules of engagement, as well as the confidence to look ahead.

As a result, the UK has been ranked as the most attractive location in Europe for future investment.

Country Which country do you think will be
most attractive for foreign investment in 2021?
(% of respondents)
UK 43%
France 31%
Germany 28%
Italy 26%
Spain 20%

Based on the results of 550 interviews with senior executives. Source: EY (2021)

That optimism has also spread to the UK stock market, where the initial public offering (IPO) issuance in the first half of 2021 has already passed the entirety of 2020.

Year Number of IPOs money raised
First semester 2021 47 £ 3.5 billion
2020 35 £ 3.1 billion
2019 33 £ 2.9 billion

Source: London Stock Exchange (2021)

Among those 47 IPOs were a number of top tech companies, including Moon pig (online greeting cards), Dark trace (cybersecurity) and Deliveroo (food delivery).

The UK venture capital scene is also thriving, with Sequoia opening of its first European office in London. Sequoia was an early investor in world-class companies such as Apple, Google, and Airbnb.

# 3: British companies are ESG leaders

British companies have historically been the first to adopt environmental, social and governance (ESG) practices. In reality, 45% of the 100 FTSE companies have started integrating ESG measures into their executive compensation programs.

UK companies are also leaders in gender diversity, always ahead of other developed markets.

Year % of director seats held by women (United Kingdom) % of director seats held by women (MSCI world index)
2016 25.3% 19.1%
2017 26.8% 20.4%
2018 29.1% 21.6%
2019 31.7% 25.0%
2020 34.3% 26.2%

Source: MSCI (2020)

This leadership could spark increased interest in the UK stock market, especially as awareness of social issues continues to grow.

# 4: UK stocks can be a great source of income

Over a 10-year period, UK dividend rates have exceeded those in other global markets.

Country / region Dividend yield (as of September 30, 2021) Dividend yield (median over 10 years)
UK 3.7% 3.9%
Eurozone 2.2% 3.2%
Japan 2.0% 2.1%
EM 2.2% 2.7%
World 1.7% 2.5%
we 1.4% 2.0%

Source: Barclays Research, Refinitive (2021)

This outperformance even lasted throughout the COVID-19 pandemic, when dividend rates around the world were rebased (a term used for declining dividends).

Watch out for zombies

While these factors provide an attractive backdrop for UK equities, the presence of zombie companies weighed on the performance of the overall market.

Zombie companies are on the verge of insolvency and are not making enough profit to pay off their debts. Their survival is only made possible thanks to historically low interest rates, which allows them to continue borrowing instead of closing.

So how many zombie companies are operating on the UK stock market?

According to Forward, a UK-based think tank, about one in five UK businesses had gone zombified by March 2020. For this reason, investors may find an actively managed approach to be beneficial. Unlike an index ETF, actively managed funds have the ability to avoid unprofitable companies.


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