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What is the state of the British stock market, and how could things transpire in 2022? Predicting the future is, of course, impossible. Yet there are trends, structural conditions and market forces at play which could indicate some likely scenarios. Below, our financial planning team at WMM discusses the UK investment outlook for the 2021-22 financial year. In so doing, we will show the importance of diversifying your investments – domestically and globally – to minimise risks to your portfolio in the years ahead.
A range of factors could act as positive forces on the UK stock market in 2021 and beyond. First of all, the UK stock market is now widely perceived as “undervalued” relative to global rivals. In the US, shares, as a whole, are especially “expensive” at the moment relative to fundamentals. For many analysts, therefore, the UK could offer a unique opportunity for investors to buy cheap British stocks – which some argue will outperform US, European and Japanese stock markets in the next 18 months. Whilst the UK faces the same threat of high inflation faced by other nations at present, the impact is seen as less significant compared to others, especially the USA.
The UK stock market, as a whole, has underperformed rivals since 2016. Many of the reasons for this still remain – namely, uncertainty over COVID-19 and Brexit. There is also an argument that the UK is currently a “value” market with poor momentum, whilst the popular investor trend at the moment is to invest in “growth” – e.g. FAANG stocks in the USA, like Amazon. The UK stock market is also heavily dominated by companies working in mining, oil and gas – sectors which are likely to face ESG pressure in the years ahead as countries seek to decarbonise. The US stock market, however, includes far more technology companies which could adapt to such an environment – and which have accounted for a large part of the growth in the S&P 500.
It is far from clear that the UK stock market is set up for a steep run-up in the years ahead. Yet the unique composition of the FTSE 100 and other indices does offer investors the opportunity to diversify their portfolio and minimise risks from too much exposure in other markets (e.g. the US). Remember, each country has its own investment opportunities and risks. Putting too much of your capital in any single jurisdiction could lead to disproportionate damage to your portfolio if things go wrong, in the short term.
The UK, for instance, still faces trade turmoil with the EU as it wrangles over Northern Ireland, fishing rights and financial services access to the continent. In the US, however, politicians continue to debate their trade approach with China, how to regard the monopoly of FAANG stocks in their markets (e.g. Google and search engines) and whether higher interest rates are needed to counter relatively high inflation (6.2% and rising). Japan, on the other hand, still has not addressed its aging population and lacks independent directors for its listed stocks (where 11% of companies are listed subsidiaries).
Yet each country – including the UK – presents investment opportunities which may not be open within your home stock market. British “value stocks”, for instance, could experience a rally if global investors switch their focus away from “growth”. It may also transpire that the UK-EU relationship finally achieves stability, and inflation proves less of a problem compared to other developed economies.
Whilst we do know the future, investors can still craft an investment strategy which diversifies appropriately and takes advantage of some of the UK market’s strengths. We suggest speaking with a financial planner if you want to learn more about global investing.
Diversification is often known as “the only free lunch in investing”. Interested in finding out how we can optimise your financial plan and portfolios? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469