The outlook for the UK economy is fairly gloomy. A contraction of 0.1% in the second quarter of the year has deepend fears of a recession that may come sooner than some economists expected. Naturally, our clients want to know how this might affect their portfolios.
Despite the less-than-ideal outlook, the FTSE 100 has performed reasonably well so far this year, and has been particularly positive over the last couple of months. This is in thanks, in large part, to its high exposure to oil and gas companies like BP and Shell. International revenues also mean that the FTSE 100 is somewhat separate from the UK economy itself.
Even so, our view on UK equities is tentative. Although UK equities (particularly the FTSE 100) are cheap versus history and have outperformed so far in 2022, there are other factors in play. Inflation is particularly high in the UK – with factors like Brexit exacerbating the problem – and the Bank of England is struggling to keep up. Just this week, the latest CPI figure of 10.1% was released for July, up from 9.4% in June.
The last comment from the Bank of England was particularly gloomy, implying that inflation would be higher for the UK than most other major economies whilst simultaneously predicting that the UK would have a lengthy recession. The country is currently in the process of appointing a new leader and it is clear that whoever takes the reigns will have a real job on their hands.
So, here’s a quick breakdown of our UK exposure and what it means for portfolios.
How great is our UK exposure?
The fact of the matter is that our exposure to UK equities is low. We tend to take a global, diversified approach to every decision we make regarding portfolios and this is no different when it comes to equity weighting.
We held FTSE 250 in our higher-risk portfolios last year, but this was cut in early October as we looked to make our portfolios more robust as our outlook on the UK cooled. As a result the UK equity exposure is a relatively small part of our allocation, sitting at just 10% of the equities in our highest risk portfolios, making up just 8% of the portfolio itself.
This % allocation to UK equities would be even lower in our lower risk portfolios, with UK equity only making up 1% of our level 3 portfolio. Having said this, in our lower risk portfolios, the government bond exposure has a higher UK weighting, as adding currency fluctuations into these low risk portfolios adds more risk. Bonds should also act as a diversifier for portfolios, and will include corporate and inflation-protected bonds – not just UK gilts.
It’s also worth reiterating that exposure to the FTSE 100, for example, isn’t a direct proxy for exposure to the UK economy. These are global companies with globally diversified revenues – upwards of 70% of their sales come from outside the UK. As a result, we still maintain some exposure for diversification purposes.
Ultimately, our exposure to the UK equities is fairly low, and our exposure to the UK economy itself is lower still.
What this means for investors
In a situation of gloomy outlooks for particular geographies, the importance of a globally diversified portfolio is highlighted. Home country bias in investing is real and it’s important to avoid falling into it when the outlook for that country isn’t great.
Both geopolitical uncertainty and inflation remain high, but there may be a case for adding to equities going forward. In any case, we’re happy with the equity exposure we currently have and that it’s not too heavy on UK assets.
In simple terms, this means that Moneyfarm clients can look at the UK economic outlook from a position of relative detachment. Any doom and gloom in the news is unlikely to significantly affect your investments with us – the point of diversification is that, even if there are losses in one geography, there are others there to pick up the slack. Outside of the UK, markets are beginning to see more positivity, with the S&P 500 – the index that tracks the performance of US giants – seeing a 17% jump since the middle of June.
For those with investments outside of Moneyfarm, it may be worth considering how UK-centric they are. Where there are better outlooks elsewhere, now might be the time to consider your allocation and think about alternative strategies. No one can predict how markets will behave, but we can follow signals to make informed decisions.
If you would like to discuss your allocation, either with Moneyfarm or elsewhere, please speak to our Investment consultant team. You can call them on 0203 745 6990 or book a free appointment with them here.
