WHate the differences between the three vaccines, trade agreements, and the imminent eviction of a self-euphoric despot!
For five years, readers have been asking in comments and emails whether exposure to UK assets should be reduced.
Brexit tends to have that effect.
But in the last few weeks I’ve been getting new queries. Given the strong pound sterling, do any readers ask if UK investors are taking excessive risks by investing heavily abroad?
Just this week Bob I wondered to us Slow and steady passive portfolio update:
I have recently begun to notice more and more that the pound is rising against the dollar.
Are you worried about currency risk given that this portfolio has a large investment in US equities? (Especially now, Brexit’s direct influence is on its way …).
Could some of the profits of the last decade come from the weakening of the pound? And are you now worried about the opposite effect?
(I’ve never come across an equity fund hedged on my platform, but I think it exists elsewhere …)
These are all valid concerns. But should we do something in response to the answer we came up with?
Easy Answer: Probably not.
Are you George Soros?
Passive investor Diversified global portfolio Signed on the ups and downs on the way to enrichment.
Getting there with minimal accidents and hassle means trying not to guess the market again in every situation.
Even active investors need to be careful Stir Their portfolio of currency speculation. The skill of choosing a stock is rare, and most people who think they have it probably don’t.
And even if you can choose high-performing stocks, it’s unlikely that you’ll be able to outpace the liquid and capricious currency markets.
That said, if you’re a naughty active breed, British stocks in their own strengths may be worth a look.
If UK stocks are hit by the global capital that put UK PLCs in Looney Bin, new signs of health, such as avoiding unconsensual Brexit, could prompt a revaluation.
Still, trade agreements are hardly breaking news. So it may already be in the price.
Why UK stocks are rising
UK stocks have been sluggish for years. London was one of the worst markets in the world in most of 2020.
Our poor performance in the US market was particularly noticeable.
Against this background, the strength of recent UK equities is noteworthy.
- In 2021 alone, ETFs tracking the total return of the FTSE 100 have increased by 5.2%.
- In contrast, Global Tracking ETFs offer only 1.6%
Of course, this is only after a week of trading, but against the backdrop of similar trends in recent months.
The UK’s Brexit resolution is part of the reason for UK stocks to rise. But there are other factors as well.
Made in the UK
It is important to understand that the UK market is dominated by the largest companies.
Many of these are large international giants in established industries such as banking, energy, pharmaceuticals and mining.
Companies of this style have been out of date for years. They are what we usually call “value” stocks. As a group, they offer little prospect of growth in a low-return world.
Sectors such as high street banks and oil companies are also facing their own headwinds.
Even with Britain’s proud “more mature” large caps, consumer giants such as Diageo and Unilever have found themselves in a difficult situation with a global epidemic. Consumers spent much less time even in pubs and supermarkets.
Recently, there are signs that some of these factors are weakening.
The Covid vaccine should ultimately mean a way out of the global epidemic. This will accelerate global economic growth rapidly.
Such an economic recovery is good news for British giants, such as energy companies and mining companies, who can benefit from cyclical recovery.
On the other hand, a democratic victory in the US presidential election could also benefit global growth.
The Biden administration may support more stimuli, even at the (potential) risk of higher inflation.
It’s also good for value sharing.
The most recent news overshadowed by the crazy rebellion in Washington this week is that the Democratic Party has gained control of the US Senate only reinforces the story.
Due to these factors, yields on US Treasuries have recently risen. Everything is equal and higher yields should be better for big financial companies like British banks.
Of course, last month’s trade agreement between the UK and the EU should not be a factor.
In fact, it has the double annoying advantage.
First and foremost, it means that the UK has avoided unconsensual conflicts from the EU and all the confusion that accompanies it.
Heavy truck jams in Dover and a lack of cabaret in Sainsbury’s would not have been so important to our large multinational corporation. But that would have hurt more domestically oriented British stocks.
Perhaps more importantly, the deal shows that the UK is “investable” again.
I don’t want to turn this into a fragment of Brexit’s good and evil, but it’s undeniable that the 2016 referendum triggered global financial managers to vote on their own feet and abandon UK assets.
The UK-EU trade deal is itself skimpy and shows that the UK has not completely lost its plans.
Global fund managers buying large UK multinationals aren’t professionally worried about whether Brexit is suitable for factory workers in Sunderland, fishermen in Hull, and even bankers in the city. Don’t forget.
They want to know that their investment is safe from the prospects of a currency crisis against the backdrop of anti-capitalist populist movements, currency control, or economic turmoil.
Trade agreements have practically removed it from the table. It also proved that the establishment of Britain did not fatally succumb to fantasy.
The UK legal framework and shareholder protection have long been admired around the world.
Finally, Brexit’s orderly resolution allows investors around the world to buy back to companies such as Vodafone, HSBC and Unilever to get a good night’s sleep.
Reasons to do nothing
Of course, none of this really addresses the concerns of our readers Bob Or other UK Passive investor..
Properly diversified passive investors have only a small allocation to UK assets, reflecting the modest size of the UK market as part of the world as a whole.
Such investors are not worried about how well the FTSE 100 will work, but rather their World Index Fund It may work if the pound keeps rising.
This is a very valid short-term concern.
Currency risk Is expected to lose (or gain) value in foreign assets as a result of changes in foreign exchange rates.
If the pound rises against the US dollar, everything else is equal to the value of US funds in Sterling.
US stocks account for more than half of the world’s indexes. This is not the end of the story, as the pound can rise against other currencies as well.
Remember Your currency doesn’t matter The fund in. Your exposure is against the currency of the underlying asset you hold.
Given all that I said above, it may seem easy to sell your global stocks and load UK stocks.
But investing is not that easy. Count why it’s best for most passive investors to do nothing.
Strategic ignorance The point of passive investment is that you know what you don’t know better than the market. Why do you think you now have a better understanding of the UK pound and equity market outlook than the combined wisdom of global investors? You probably aren’t. Stick to the plan.
easy come Easy Go UK passive investors using global trackers enjoyed a big plunge in 2016 when the pound was devalued in a surprise vote on Leave. Well, so what if some of it is now reversed? Diversified portfolios always have wins and losses. It is unrealistic to want to get only profit.
You already have a lot of UK exposure Decentralized passive portfolios usually have a large slug of UK assets in the form of UK government bonds. You may also own your own home in the UK. Almost all of us are paid in pounds.There is no doubt that the exposure overseas Counter weight To all of this.
Strong pounds can be bad for UK stocks Suppose you dump a global tracker and switch to something that follows the London FTSE All-share or FTSE 100. Did you know that at least 70% of the revenue of a UK listed company comes from abroad? This means that as the pound rises, the value of those returns declines. As a result, UK stock prices could fall. to see? Swings and roundabouts.
I don’t know where the pound goes It is important to repeat this. It may seem obvious that the pound will rise from here, especially against the US dollar. When I used to visit America for work 20 years ago, I was always rich. It was the best with pounds bought over $ 2 in 2007! However, there is no law that requires these exchange rates to be reviewed. The British pound bought $ 5 in the early 1900s. It has been weakening for over a century. In the short term, rising yields in the US could support the dollar more than the more dying UK interest rate outlook.
The time to switch may have passed The market is looking to the future as many people are confused. For example, the sharp rise in stock prices after the crash in early 2020 seemed ridiculous to some. However, the clever market weighed the evidence and decided that Covid would not cause a recession. In particular, not all money has been invested. Similarly, the UK’s wealth situation began to brighten a few months ago as markets foresaw trade deals and liked the look of vaccines. By the time most investors think about something, it’s already happening.
As always, it comes down to this: what do you know better than the market?
Pay pounds of your meat
However, I don’t think the market is completely efficient.
There is strong evidence that stock prices are gaining momentum, and there is some evidence that investors are slow to discount all changes from news events.
The pound may need to go further, even behind what we already know – and UK stocks could also get better.
One option for passive investors who have decided to interfere is to hedge some of their overseas exposure. Hedged ETFs Tracker fund. There are various options there.
You should already be doing this with the foreign bonds you own. (If not, see this summary Cheap index tracker, Including some hedged bond ETFs).
Alternatively, you can increase your allocation to UK stocks if you really really have to. But don’t go all-in! Switch 25% of global funds to UK trackers instead of 100%. (And don’t forget that you gave yourself the problem of having to decide when to undo …)
As Naughty active investor I admit that I’m guessing in support of Brexit, exchange rates and much more. But I did it 5 years ago, so I’m thinking of doing it in another 5 years.
Want to be honest with you? Are you ready to pay for what is wrong?
Most passive investors need to stay on track.
We’re happy to avoid the worst that Brexit could have thrown at us and focus on the long-term picture, even if Britain’s assets reach that moment in the sun. I will.
Need to sell a global tracker fund in UK equities?
https://monevator.com/should-you-sell-your-global-tracker-fund-for-uk-shares/ Need to sell a global tracker fund in UK equities?