WITH the UK economy barely growing and still smaller than its pre-pandemic level, it is hard to get enthusiastic about the prospects for our home market. The ongoing cost-of-living crisis, high inflation and rising interest rates may be hard to ignore, but you’d be wrong to think it’s all doom and gloom in the UK.
The economy and the market march to a different beat. Investing in the UK market is really not the same as investing in the British economy and there are plenty of opportunities.
With spring in the air once more, the UK is actually one of the more interesting investment destinations, even if the markets here have suffered recently with the volatility affecting the banking sector.
Tracker funds are a cheap way in
There are a whole host of challenges for businesses and households – not the least of which is a fragile housing market. But a few sectors are notable for their resilience in this environment – and thankfully, the UK market is heavily weighted towards them.
Commodities are both a cause of inflation and a beneficiary of rising prices. The past week has been tough for financial services companies, and banks in particular. Over the slightly longer term, however, the current environment of rising interest rates is positive for these companies. They make their profits in the gap between what they charge for loans and pay out on deposits. The difference between the two tends to be greater as interest rates rise. Big banks like Lloyds and HSBC have reported strong performances this quarter.
A tracker or index fund is a cost-effective way of gaining access to the UK market generally, and indirectly to these two important sectors. They provide access to big household names as well as less well-known smaller companies and, because they do not require expensive teams of analysts, their fees are lower than actively-managed funds.
Two funds to consider are the iShares Core FTSE 100 UCITS ETF and the Vanguard FTSE 250 ETF – both of which are on our Select 50.
Read more tracker fund ideas from our Select 50 here.
Cheap valuations in the UK’s bargain basement
Another attraction of the UK market is its relatively cheap valuation – measured as a multiple of expected earnings, the UK is little more than half the cost of the more popular US market. As well as the scope for share price growth, this discount attracts foreign investment and raises the chance of company takeovers. Shareholders benefit from the premium price that a bid attracts.
The Fidelity Special Situations Fund is worth considering. It invests at least 70% in UK companies – its top holdings include Barclays, Aviva, and Imperial Brands. It invests in companies it believes to be undervalued with recovery potential that’s not recognised by the market.
Dividends for income investors
Investors will often seek out shares that pay a dividend – either to take as income or to reinvest in the stock market.
A dividend paying fund on the Select 50 that you may want to consider is the FTF Martin Currie UK Equity Income Fund.
This fund aims to generate an income that’s higher than the FTSE All-Share Index. It typically includes 40 to 60 company shares – with most of these being issued by large, established companies. Its current holdings include BP, Shell, Unilever, Rio Tinto, British American Tobacco, and GSK.
Take advantage of long-term growth
But the UK is not just a value-focused, income market. There are plenty of growth companies that are worth including in a portfolio – particularly for investors looking to invest for five years or longer.
The Liontrust UK Growth Fund includes popular UK companies such as BAE Systems, GSK and Unilever.
The UK brings a variety of opportunities for investors – whether you’re looking for inexpensive exposure, income or access to the most successful, fast-growing companies, the UK market should be on your radar this year.
