Heard of home bias? It’s nothing to do with preferring a night on the sofa to a big night out — it refers to the fact that typically, investors like to back companies listed in the country where they live.
Arguably this trend has been somewhat bucked on these shores, with money pouring out of UK funds over the past few years.
Although many investors are flocking to US trackers and the big tech and AI stars, last week I explored some of the merits of investing in Europe. But there’s also no place like home — especially when company valuations are so compelling.
UK stocks have long been cheaper than their international peers, despite the FTSE 100 reaching record territory this year. And with inflation holding steady at the Bank of England’s target of 2 per cent for two months in a row, a cut in interest rates must surely be on the cards for August. Falling interest rates and slowing inflation could provide a well-earned boost to those investing in the UK.
There’s also the fact that the new Labour government has highlighted the need to stimulate the UK economy, which could create a further uplift.
Markets trade on a forecast price-to-earnings (P/E) ratio — a measure of how much investors are willing to pay for each pound of profit in a given market. The FTSE 100 trades on a P/E of about 11 and an income yield of about 3.9 per cent, according to the wealth manager RBC Brewin Dolphin, which used Bloomberg data this week. That compares with a P/E of 14.36 and an income yield of 3.19 per cent for the MSCI Europe index and a P/E of 18.77 and income of 1.85 per cent for the S&P 500 index in the US.
Buying stocks just because the price is low is not a smart investment strategy, of course, but there are some seriously solid businesses in the UK that can perhaps be relied upon in times of volatility elsewhere.
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Alexandra Jackson, a fund manager at the investment firm Rathbones, believes that the recent run of strong performance from UK markets can continue. She said investors may look to the UK as something of a safe haven in a global market that is fraught with challenges such as political uncertainty and highly concentrated returns. “With inflation back at target level, GDP forecasts being revised up, and sterling the strongest leading currency this year, the stars really are aligning,” she said.
Investing in the UK still offers exposure to other economies because some of the largest members of the FTSE 100 are multinationals whose sales and profits come from around the world. More than four-fifths of the sales of FTSE 100 constituents in 2022were derived from overseas markets (compared with about 55 per cent for the mid-cap FTSE 250 index), according to London Stock Exchange figures.
As Charles Luke from the Murray Income Investment Trust (run by the fund firm abrdn), put it, “investors are benefiting from global income at a knock-down price”.
Investors can also enjoy decent dividends from many UK companies. Dividends rose 4.9 per cent to £15.6 billion in the first quarter of 2024, with 95 per cent of payers either increasing or holding dividends steady, according to the Dividend Monitor from the tech firm Computershare.
However, underlying growth was slower, Computershare said, with regular dividends rising just 2 per cent to £14.7 billion as most sectors delivered steady low single-digit growth. Its report included a forecast that British businesses will pay out £94.5 billion in dividends this year, including special dividend payments, which marks a 4.3 per cent increase on 2023.
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What’s unique about the UK main market is that, according to Bloomberg, the FTSE 100’s combined market cap is about 12 per cent oil and gas companies, 7 per cent miners, roughly 10 per cent pharmaceuticals and 10 per cent banks. Collectively that’s nearly 40 per cent of the market.
Companies from these sectors make up the top ten holdings in many UK funds and will also be a large proportion of tracker funds.
Fidelity Special Situations, for example, holds the financial services firm Aviva and the tobacco company Imperial Brands in its top 10. Over five years the fund has returned 39 per cent. There’s also Artemis UK Select which holds BP and Shell, Rolls Royce and Barclays. The fund has returned 77 per cent over five years, according to the investment firm Hargreaves Lansdown.
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The tech sector is noticeably underrepresented in the UK — you won’t find big tech behemoths here, although there are exciting prospects if you look beyond the FTSE 100. RELX is a data and analytics business formed from the merger of the paper, print and packaging group Reed International and the Dutch publishing firm Elsevier.
The company, now based in London and listed on the FTSE 250 index, provides information-based analytics and decision tools for professional and business customers globally. Bank of America included Relx as one of the top 20 firms likely to benefit from generative AI. It was the only UK company on the bank’s list. Its share price is up 36 per cent in 12 months.
London-based Telecom Plus is the FTSE 250 company that, as Utility Warehouse, sells home energy, broadband, and mobile services. Its share price is up 6 per cent over a year.
In the Aim (Alternative Investment Market) index you will find the Surrey-based firm Bytes, which sells laptops and bundled software licences to clients. Its share price is down 3.7 per cent in a year.
If you want to bet on the rise of smaller companies — which usually flourish fast when interest rates start falling — there’s Amati UK Listed Smaller Companies. The fund’s top ten holdings include the mobile telecoms business Gamma Communications, and Trainline, the rail and coach ticketing service. Over five years the fund is up 8 per cent.
Rathbone UK Opportunities holds Bytes, the kitchen giant Howden Joinery Group, which is based in Yorkshire, and Tesco. The fund has returned 20 per cent over five years.
For investors looking to access UK companies paying dividends for income, Artemis Income holds RELX, the retail giant Next and the London Stock Exchange Group in its top ten. Over five years the fund has returned 40 per cent and paid an average of 4 per cent dividend income in the past 12 months.
So, although the UK has been thoroughly out of fashion for a long time, perhaps it is time to start ignoring the trends and enjoy a little home bias. It is where the heart is, after all.
