Today the FTSE 100 touched the level it was at before Lehman Brothers collapsed in October 2008, the markets tanked, and we all checked our cupboards for cans of baked beans.
But more interesting is that of the major developed markets, the UK has risen the most since then. The U.S. and the Japanese markets are still more than 10% below their pre-Lehman crash levels.
That’s pretty remarkable given how the UK economy has been mired in recession, not to mention the bad press UK equities have received from the likes of Jim Rogers.
Of course, you might say that being the best market compared to the US and Japan is about as impressive as being the best of the awful Star Wars prequels.
It’s true too that emerging markets have done far better, with many doubling in the period.
But most investors put most of their money in their major home markets, and anyone in the UK who stuck with the FTSE 100 has been well-rewarded.
I’ve been massively overweight in UK equities for 12 months; even when I’ve had emerging market exposure, most of it is via UK stocks like The City of London Investment Group.
I also cashed in my much of my gains from the weakening pound in early 2009, selling down (but not completely) my U.S. and Japanese trackers and switching money back to the UK.
About the only basket of equities that I regret not putting more money into is technology stocks. I expected a tech stock rally (based on lots of cash and cheap valuations) and bought Polar Capital Trust; it’s up over 50% and I wish I’d bought more.
But overall, the UK has been where it’s at – thankfully!
Three reasons to buy British shares
In the medium-term I’d like to hold a more diversified portfolio (and I think Japan looks cheap).
But right now I’m happy to continue with this over-exposure to the UK market, via trackers and individual share picks, for at least three reasons.
1. I’m bullish on global growth
Over 50% of the FTSE 100’s sales are made overseas – some estimates put the percentage as over 70%.
The huge companies that dominate the UK index like HSBC, Shell, Vodafone and GlaxoSmithKline are about as dependent on the UK economy as a hotdog vendor in New York’s Times Square. Anyone looking at the UK economy and thinking they should avoid the major UK shares is making a major error.
If you believe as I do that world GDP is going to bounce back strong in 2010, then the UK market is a great buy, as well as a convenient one for UK investors!
2. The dollar is in the same boat as the pound
More than 50% of FTSE 100 earnings are generated in dollars or in dollar-pegged currencies (such as China).
For this reason, the weakening of the pound versus the dollar has been a boon to UK companies.
A couple of years ago, it took over $2 to buy £1. Now it takes about $1.65, and the exchange rate has gone as low as $1.30.
A weak pound means earnings are boosted in sterling terms when overseas funds are converted back into pounds. It also makes UK goods more competitive, helping UK companies I hold like James Halstead and Goodwin.
If there was any danger of the pound rallying hard against the dollar to take us back to a $2:£1 cable rate, I’d be worried about FTSE 100 earnings.
But happily – from the point of view of an investor, as opposed to a UK taxpayer – I think both economies are in the same sort of condition, with a dynamic and rebounding private sector burdened by elephantine public sector debts.
Predicting currencies is a mug’s game, but at $1.65:£1 I think the risks are broadly balanced. Even a sterling crisis that saw UK rates jacked up might first boost FTSE 100 earnings, providing some hedging.
Despite the UK economy being dominated by financials and services, the legacy of our previous global adventures has left us with a stock market offering massive exposure to mining and natural resources.
In the medium term the U.S. and other more ‘valued-added’ markets may do better, particularly if we see that tech rally.
But for now the FTSE 100’s mining over-exposure looks good – emerging markets are still consuming raw materials, and in a year or two as advanced economies increase consumption, that should support prices further.
Other reasons to hold UK shares in 2010
The FTSE 100 still pays the highest dividend of the major world markets, at around 3.5%. I love dividends!
Admittedly this income was slashed as banks and others cut their payouts in the crisis, but the payout is now growing again in absolute terms.
Another reason for holding UK shares is valuation – I think this is still be a great time to buy shares for the long-term. But I believe that’s still equally true of the U.S., Europe and Japan, so it isn’t a reason to pick UK stocks specifically.
What about UK government bonds? Regular readers will know I’m waiting for a good time to buy gilts, and I see 10-year yields have crept above 4%. But that’s still too expensive, in my view, making gilts unattractive compared to UK equities.
Buy big as well as British
Note that to enjoy the benefits I’ve outlined above, you need to invest in the global businesses that dominate the FTSE 100.
My investments in UK investment trusts like Aberforth and Rights and Issues back smaller companies more exposed to the UK economy, and it shows in their performance.
Purchases of these trusts made around the bear market low in March 2009 have done well, but that’s because they were battered down by fear. I don’t think they’re benefiting from the global recovery like the FTSE 100.