The UK stock market: could do better
The UK stock market, when compared to those of the US and the rest of Europe, has performed poorly. Matthew Courtnell, Equities Product Specialist, explains why.
Cast your mind back to the classroom and a time when you didn’t exactly cover yourself in glory. While your classmates averaged a ‘B+’ for their homework, your assignment barely scraped a ‘C-‘. It’s a bit like that in stock markets now.
The UK stock market, when compared to those of the US and the rest of Europe, has performed poorly. In truth, it hasn’t done particularly well since the time of the 2016 Brexit referendum and its aftermath, with subsequent months of seemingly endless political tensions.
But stock markets tend to be governed less by long-term political events and guided more by the overall health of companies. So, what’s the real reason for UK shares being left out in the cold?
Old versus new
We believe it could be something to do with the actual make-up of the UK stock market. Compared to the US, and even Europe, the UK remains heavily wedded to the ‘old’ economy, where certain businesses face real structural challenges.
Compare that with the rise of the ‘new’ industries. Technology groups Apple*, Amazon*, Facebook* and Microsoft, * which are all US-based, have undoubtedly been the clear winners in the global pandemic as more of us turn to internet shopping and remote working. Sadly, the UK has very little exposure to these types of companies. You can read more on the march of the technology titans here.
The other reason why, we believe, the UK stock market has fallen behind its peers is because of the relative strength of sterling for much of this year as compared with other currencies. The UK is made up of many large international companies, whose profits come from overseas. When these are converted into sterling, however, profits are lower than they would have been had these companies derived all their profits from the UK. Of course, when sterling is weak the reverse happens and profits from overseas operations are higher.
Don’t write off the UK stock market just yet
That’s not to say we should write off the UK stock market just yet. Many companies don’t know how profitable their businesses will be given the current pandemic. But, we believe, some companies will be able to benefit from a recovering UK economy as, and when, activity eventually starts to get back to normal. These types of businesses are typically found in areas such as housebuilding, construction and transport.
The UK is also home to both industry leaders and companies which, we believe, are strong in environmental, social and governance (ESG) fields. ESG factors assess how well companies are prepared for global challenges such as climate change or how they’re treating their employees or suppliers. To learn more about ESG-related investing, watch our short video here.
Where companies have strong brand names, continually innovate, or transform themselves as a result of buying new business that complement their own, we call these companies the ‘whatever winners.’ They steadily grow their sales, year in, year out, irrespective of the economic climate. We believe these types of businesses present a winning formula for creating value in any environment.
Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.
*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.