Why we invest globally for our clients

News that companies such as Apple and Microsoft are now worth a similar amount or more than the entire UK stock market shocked investors earlier this year. The UK stock market is now worth £200 billion less than its French counterpart. In fact, it makes up just 4% of the MSCI All Countries World Index, compared to just over 8% in 2011. London has also been missing out on recent high-profile Initial Public Offerings. This was not always the case. In the past, London jostled with New York and Hong Kong. However, today’s figures suggest London faces a slow decline at a time when Amsterdam and other markets are gaining market share.

While some may prefer to invest domestically, too heavy a reliance may mean investors are taking unnecessary risks and missing out on returns. In today’s challenging economic backdrop, this is particularly pertinent. One key difficulty is that the UK equity market is relatively narrow when it comes to sector exposure. It’s dominated by financial, energy and materials companies (see table below). While it includes some big healthcare companies, it has no meaningful exposure to technology.

MSCI regional indexes, split by sector

Free from bias

We want to be free to invest in the best global companies. These may or may not be listed in the UK. Today, our client portfolios include global funds, which will own companies such as AstraZeneca and Microsoft, as well as some funds specialising in smaller “mid-cap” companies. Of course, this doesn’t rule us out from investing in British companies if we identify good value. For example, we are currently seeing opportunities in UK mid-size firms – a sector that has been particularly unloved by investors for a long time.

A global approach does involve some currency risk. However, a high proportion of the revenues from FTSE100 companies come from outside of the UK – as much as 80%. So this means that the UK’s biggest companies already come with a high degree of currency risk. If the pound was to rally significantly from current levels, big corporates with dollar or euro earnings would see their share prices under pressure as those earnings become worth less when translated back into sterling.

We closely monitor our currency exposure and take steps to manage it when necessary. We generally aim to keep our lower risk and diversifying assets in our client portfolios in their home currency – which is largely sterling.

The issue of inflation

UK inflation remains stubbornly high – above any other major economy. That’s a real challenge when it comes to investing as it forces the Bank of England to keep raising interest rates, creating difficulties for households and domestic companies. In the short term, we expect further increases in interest rates before they are put on hold. Over the medium term, we expect inflation will start to fall. In turn, this will reduce the pressure to keep rates high.

Having said this, UK bond markets are looking somewhat more attractive as anticipated rate increases have been “priced-in.” While returns in the short term may not exceed inflation, bonds are offering a more meaningful return than they have for a long time. They should also help to protect portfolios if we see more meaningful signs of a slowdown at which point markets will look for yields to fall and prices to rise. Many UK bonds can also be particularly tax-efficient investments for UK taxpayers.

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