By Aviva Investors
The UK stock market has long been unloved by investors, but with several factors now swinging in its favour, could it be the time to consider UK equities again?
Don’t forget, the value of your investments can fall as well as rise and you could get back less than you invested.
What to expect from UK equities
The UK market is highly diversified, offering investors exposure to companies of varying sizes across a wide range of industries and sectors. It gives investors the opportunity to invest in companies exposed to the domestic economy, such as housebuilders, domestic banks and retailers, as well as companies that earn large proportions of their revenues globally with the likes of Unilever, AstraZeneca and Burberry being prime examples.
Despite companies located in Silicon Valley grabbing most of the technology-related headlines, the UK also has a lot to offer on this front. Many companies further down the market cap scale have been delivering strong growth and impressive price returns because of their market-leading technologies. Major interest in several recent initial public offerings (IPOs) helps to highlight this. So, the UK is not one to be underestimated in terms of innovation.
When compared to equity markets such as the US, you’ll see oil & gas, financials, and consumer staples companies feature more heavily within UK indices. This does mean the UK tilts towards value stocks (those that appear to be priced lower than they should be on analysis), but it also means that higher yields are generally on offer in other markets.
How have UK equities performed?
The UK’s performance on the global stage has arguably been lacklustre in recent years, mainly brought about by uncertainty after the 2016 Brexit vote. This dented the confidence in UK companies and made many domestic and international investors look elsewhere.
The value style of investing has been unpopular for much of the last decade with investors largely choosing to seek out companies able to grow their revenues and earnings at faster rates than the market. This, again, has had implications for UK equities’ performance given the tilt the market has in terms of style.
The pandemic hitting the UK particularly hard didn’t help either. The consumer-centric economy suffered as shops, restaurants and other retail facilities closed – many for good. However, as vaccines for COVID were created, the prospects for the economy improved dramatically. Since that, the UK has largely kept pace with other markets. This has been helped in part by its value-bias as investors looked to snap up the shares of companies in some of the worst hit sectors – a reversal (to an extent) of previous misfortunes.
Should you consider UK equities?
With Brexit woes receding, a successful vaccine rollout, and prospects of a strong bounce back in the economy, international buyers of UK companies have arrived in some force. Albeit some have been in the form of private equity firms, which many see as controversial. This is because private equity firms often use borrowed money, so debt piles up for the company they’re going for – this happened with Debenhams. Despite this, bids for UK companies have helped to shine a light on the attractiveness of UK assets and could help them to claw back some of the underperformance we have witnessed in recent years.
We’ve seen significant growth in Environmental, Social and Governance (ESG) and sustainable investing recently. Research from the UK Sustainable Investment Finance Association suggests that between 2015 and 2017, ESG growth was 76% in the UK compared with 60% in Europe . Fund managers are also increasingly including ESG factors in their decision-making and aligning their portfolios with climate-related targets. For more conscious investors, there are certainly lots of opportunities in the UK Equity sector.
How could you use a UK equity fund?
It is important to ensure that diversification is maintained when thinking about investing in a UK equity fund. Not only should it be blended with funds with different geographical exposures, it should also be used alongside funds with a similar geographical focus but those focusing on a different style of investing, such as growth investing (investing in growth stocks – those expected to increase their earnings faster than the rest of the market) to value investing – buying value stocks. You could also look at the portion of the market cap spectrum, large-cap (shares of large companies) to small-cap (shares of smaller companies).A UK equity fund may also be used as a source of income given that the yields on offer can be attractive relative to other asset classes. But investors should bear in mind that these yields can come under pressure in times of market stress, as we saw in 2020, and are not guaranteed in any market conditions.