Investors are under increasing pressure to ditch the “home bias” by selling off UK equities and adding to their holdings in emerging markets.
A study, unveiled this week by Ignis Asset Management, reveals that nine out of 10 advisers believe Britons are overexposed to the UK, and could benefit from looking abroad for higher returns.
Australians and Americans are similarly loyal to their own markets, claims Jason Butler, partner at Bloomsbury, the advisory firm.
“The research suggests, and my experience supports it, that investors suffer inertia and seem to like to invest in funds and companies that they know and experience on a daily basis,” he explains.
As the UK’s gross domestic product (GDP) accounts for less than 10 per cent of the world’s GDP, keeping half of your investments in UK equities is ill-advised, advisers say. A more suitable choice would be to favour a 3 to 19 per cent allocation in the UK, according to Butler, with the rest spread across fixed income, emerging markets, property and developed markets (see pie charts above for guidance).
As forecasts for UK equities turn pessimistic, the case for rejigging portfolios is becoming more compelling. Nine out of 10 of the managers surveyed by Ignis expect the FTSE 100 to drop below 5,000 by the year’s end, with 56 per cent forecasting that the index will fall to between 4,500 and 5,000 and about a quarter predicting it will end up between 4,000 and 5,000.
As markets swung wildly in the past year, investors’ kept more of their money in the UK. But with UK equities likely to disappoint in the near term, emerging markets now look more appealing.
The MSCI emerging market index – a barometer of the sector’s strength – has risen 155 per cent in the last five years, while the FTSE 100 has returned just 34 per cent over the period, according to Morningstar.
Currency risk poses some concern as unfavourable changes in exchange rates would limit returns for investors who trade in sterling. But fluctuations in the value of euros and US dollars also pose risks even for those who choose to concentrate exclusively on the UK market as companies such as GlaxoSmithKline and BP receive a large chunk of their revenues in these currencies, points out Hugo Shaw, investment manager at Bestinvest, the advisers.
Shaw recommends that investors keep 20 to 50 per cent of their portfolio invested outside the UK. “The UK is not a dominant force in IT or car manufacturing or many other sectors,” he says. “Sticking to the UK will mean you miss out on opportunities to benefit from growth in these areas.”
“It is time to move beyond last year’s trauma and take a business as usual approach to investment decisions,” says Aaron Gurwitz, head of global investment strategy at Barclays. “That means, broadly, holding more stocks and fewer bonds than typical and having more exposure to asset classes and sectors that do better in early stages of recovery.”
Buying US small-cap stocks, which tend to outperform in an upturn, was one suggestion made by Gurwitz. Another was marking up exposure to a diverse bunch of commodities as a rebound in prices is expected. Inverse floating rate and capped floating rate notes – types of bonds – offer the chance to exploit opportunities if predictions that “monetary policy will be tightened in the major economies much more slowly than current market prices imply” are realised, according to Barclays.
Asian stocks look attractive as well. And lastly, purchasing Norwegian kroner and Australian dollars is recommended as interest rates are likely to rise in both countries in the near term, which could push up the prices of these currencies.
Barclays advisers also express optimism about economists’ rosier growth forecasts for 2010 and the likely recovery of emerging markets before developed ones.
“We see investment opportunities in both the commodity and currency markets. Commodity prices have not risen this year by as much as we normally see towards the end of a recession, so holding a diversified basket of commodities is a good way to position for continued recovery in global demand,” says Brian Nick, an investment strategist with the bank.
He also sees value in holding the currencies of countries that did not experience as severe a recession as their peers and could stand to benefit as a result. “In particular, countries boosted by commodity-related exports should continue to see their exchange rates appreciate,” he says.
A survey last month by Merrill Lynch underlines fund managers’ bullishness for emerging markets. More than half of the 174 fund managers polled have taken either aggressively overweight or moderately overweight positions in emerging markets equities while just 18 per cent are overweight in the UK; 28 per cent in the eurozone; and 32 per cent in the US.
More than half of the managers who took part thought the euro was overvalued while more than a third believed the yen was.
Half of the managers predict that large caps will outperform small caps and “value” stocks are poised to do better than growth ones in the next year.
