After a decent showing in 2022, the UK stock market has failed to fire in 2023. The good news for investors is shares in other parts of the world have done much better and it has never been easier to have a globally diversified portfolio.

There is an excellent range of products and instruments which allow you to participate in the returns from markets across the globe and, in this article, we provide a snapshot of these different options. And if you think UK stocks are looking undervalued after years of underperformance, we provide some insights into how to play them too.

---

– US –

WHAT IS THE ATTRACTION OF THIS REGION?

US stock markets give investors access to one of the deepest and most liquid capital markets which are home to the world’s largest and most successful companies.

Investing in US companies means getting exposure to an economy which has proven to be very resilient, and dynamic. US companies derive 71% of their revenues domestically, one of the highest proportions among developed markets, according to Morgan Stanley.

Buying US stocks and bonds means getting exposure to the world’s reserve currency. The US dollar tends to benefit during times of economic stress as investors buy US treasuries for relative safety.

Although the US has had its fair share of stock scandals, US markets are well regulated with good investor protections and a strong rule of law.

WHAT ARE THE KEY RISKS?

US stock markets have delivered strong returns over the last few months, and over the last decade. Investors may have got ahead of themselves with sentiment running ahead of the fundamentals.

US markets are overvalued on several valuation metrics such as the cyclically adjusted PE (price to earnings) ratio which means they are vulnerable to a pull back as Shares recently highlighted. 

In other words, US markets are priced for perfection and do not factor in significant  recession risks. 

---

---

THE INDICES THAT MATTER AND PRODUCTS TO TRACK THEM

The benchmark US index is the S&P 500, comprised of the 500 largest companies by market capitalisation.

Investors looking for passive exposure could consider the iShares Core S&P 500 (CSP1) which has $45 billion in assets and total expense ratio of 0.07%.

The Nasdaq 100 index is comprised of a selection of non-financial firms listed on the Nasdaq exchange. It is often used to get exposure to the biggest technology companies. This can be tracked through the Lyxor Nasdaq 100 (NASL) which has $1.4 billion of assets and ongoing charges of 0.22% a year.

TWO FUNDS WITH DIFFERENT APPROACHES

The £4.2 billion JP Morgan Equity Income Fund (B3FJQ59) invests exclusively in large attractively valued dividend paying stocks that are expected to continue growing their dividends.

The stocks are selected by a highly experienced investment team leveraging fundamental insights from more than 20 US-based equity research analysts.

The fund has a trailing dividend yield of 2.5% and an ongoing charge of 0.79% a year.

Artemis US Select Acc GBP (BMMV510) is steered by Cormac Weldon who has been investing in US equities for over two decades and Chris Kent. A team of sector analysts supports them.

The team conduct fundamental analysis to identify stocks which have more growth potential than inherent risk. The £1.6 billion fund has an ongoing charge of 0.85%. [MG]

---

– UK –

WHAT IS THE ATTRACTION OF THIS REGION?

If you believe many people, not much. The UK has been cast as the poor relation to other major stock markets thanks to a dreary performance in recent years; for example, the S&P 500 and Euro Stoxx 50 are up 40% and 30% respectively over the past three years, versus 19% for the FTSE 100.

But such an observation is a little unfair given the scale of income stocks that dominate the UK market. The FTSE 100 currently implies a 3.77% forward yield, which alone implies investors could be two-thirds of the way towards a long-run average total return of about 6%.

It’s also worth noting the global exposure of the UK market, where roughly 70% and 50% of revenues are earned outside of the UK for the FTSE 100 and FTSE 250 respectively. That’s instant geographic diversification.

WHAT ARE THE KEY RISKS?

Sticky as a spider’s web inflation remains the big challenge, making us all feel poorer and meaning interest rates are likely to stay high for longer, upping the cost of capital for business and stretching mortgage repayments for millions.

This is not a forum for political debate but it’s fair to say Brexit has not helped matters, creating supply chain chaos and, arguably, feeding rising prices. This said, analysts see demand remaining supportive and the overall UK economy remaining resilient.

From a stock market standpoint, relative value in the UK is seeding M&A activity, creating opportunities for investors. But for UK markets to reverse years of underperformance versus peer indices, more growth companies will be needed to attract investors’ interest, especially from overseas.

---

---

THE INDICES THAT MATTER AND PRODUCTS TO TRACK THEM

Worth about 85% of the UK stock market, the FTSE 100 is not only the nation’s equity benchmark, but it also makes it by far its most influential index and is treated as the lead indicator of the mood of UK share buyers and sellers. There are countless inexpensive ETFs to track the FTSE 100, such as the highly popular Vanguard FTSE 100 (VUKE), which carries a 3.8% income yield, or iShares Core FTSE 100 (ISF).

Many investors perceive better growth opportunities among UK mid-cap, or FTSE 250 constituents. Investors are well- served here too; the Vanguard FTSE 250, which can be bought via income paying stock (VMID), or have dividends ploughed back into the fund (VMIG).

TWO FUNDS WITH DIFFERENT APPROACHES

The Evenlode Income Fund (BD0B7C4) and BlackRock Throgmorton (THRG) investment trust are two popular ways to invest in UK stocks. They share many of the same characteristics, seeking to run a high-conviction portfolio of high quality, financially strong, highly profitable and cash generative companies, typically with a growth tilt.

But there is a key difference, where two-thirds of the former’s assets are drawn from the FTSE 100, the BlackRock trust hunts for opportunities among smaller UK companies, including AIM-quoted stocks like Gamma Communications (GAMA:AIM), CVS (CVS:AIM) and 4imprint (FOUR), the FTSE 250 promotional products supplier. [SF]

---

– EUROPE –

WHAT IS THE ATTRACTION OF THIS REGION?

The conventional view of global markets is that the US is the best place to find growth and innovation while Europe is home to more stodgy, less dynamic businesses.

As Alan Ray at Kepler Partners puts it: ‘The US has long been exceptionally good at producing the types of companies that, given time and investment, can and do disrupt entire business models, or create entirely new ones. The US is simply good at that kind of stuff, and its equity market often benefits as a result.’

Yet the fact is Europe can boast world-beating companies of its own, from fashion to pharmaceuticals and semiconductor companies, and unlike many US firms which just focus on their domestic market European companies tend to sell their wares globally.

WHAT ARE THE KEY RISKS?

The problem for European companies is their valuations seldom match their US counterparts.

As Kepler’s Ray points out, the MSCI Europe index currently trades on 12 times forward earnings, has a price-to-book ratio of 1.8 times and yields 3.3%, while the MSCI US index is on 18.6 times forward earnings, has a price-to-book ratio of four times and yields just 1.6%.

The war in Ukraine and the resulting surge in energy prices saw investors withdraw around $100 billion from European equities last year, with much of that money reinvested in US stocks and bonds.

---

---

THE INDICES THAT MATTER AND PRODUCTS TO TRACK THEM

As well as the MSCI Europe index, individual country benchmarks which investors should watch are the German DAX 40, the French CAC 40 index, the Dutch AEX 25 index and the Swiss SMI index.

Popular ETFs (exchange-traded funds) include the Lyxor Core Euro Stoxx 50 (MSED) and Lyxor Core Stoxx Europe 600 (MEUD) which carry an ongoing annual charge of just 0.07%.

TWO FUNDS WITH DIFFERENT APPROACHES

Sam Morse, who has managed £1.5 billion Fidelity European Trust (FEV) for the last 12 years, looks for companies which are ‘built to stand the test of time’, meaning they can grow their dividends as well as generating capital gains whatever the economic backdrop.

Christian Diebitsch, manager of the Heptagon European Focus Fund (BPT3468), has a different strategy, taking a high-conviction, bottom-up approach to invest in a small number of high-quality businesses (typically between 20 and 30) with sustainable long-term growth purely for capital gains. [IC]

---

– JAPAN –

WHAT IS THE ATTRACTION OF THIS REGION?

Japan has a wealth of high-tech and high-quality companies which are becoming increasingly shareholder friendly, returning more to investors through dividends and buybacks. This increased generosity is underpinned by extraordinarily strong balance sheets.

Weakness in the yen, driven by a looser monetary policy in Japan than in the West, is supporting exports which account for a sizeable proportion of GDP. The country is also benefiting, to some extent, from a reopening of the Chinese economy and an increase in regional tourism. Domestically increasing wages are helping to boost consumption.

Alongside a lot of lesser-known businesses which are nonetheless at the forefront of developments in areas like automation and robotics, Japan is also home to household names like Sony (6758:TYO), Nintendo (7974:TYO) and Toyota (7203:TYO).

WHAT ARE THE KEY RISKS?

One substantial risk for investors to consider is the robust performance of Japanese stocks so far this year and whether this could encourage a bout of profit taking as valuations become more stretched.

Currency is another potential hazard and investors should be aware this will affect their returns. A weak yen against sterling means UK-based Japanese funds (priced into sterling) have not kept pace with the performance of underlying Japanese indices.

---

---

THE INDICES THAT MATTER AND PRODUCTS TO TRACK THEM

The main index to watch when tracking Japanese shares is the Nikkei 225, often shortened to Nikkei. 

This is a price-weighted index with the constituents reviewed annually.

There are a decent number of exchange-traded funds tracking Japanese stocks, such as iShares Core MSCI Japan (SJPA) which has an ongoing charge of 0.15%.

A currency hedged tracker like UBS MSCI Japan UCITS ETF (hedged to GBP) (UB02) looks to balance out foreign exchange moves. Such products are typically more expensive with the UBS one charging 0.29% but such a product would have enabled you to better participate in Japan’s first-half 2023 rally.

TWO FUNDS WITH DIFFERENT APPROACHES

M&G Japan (B74CQP7) has delivered an annualised total return of 9.1% over the past 10 years. A concentrated portfolio, it has a focus on both growth and value. Top holdings include Hitachi (6501:TYO), Sony and Honda Motor (7267:TYO). The ongoing charge is 0.55%.

A slightly different approach is pursued by Nippon Active Value Fund (NAVF) which looks to actively engage with companies in its portfolio to help drive improved performance and unlock value. Launched in February 2020, the trust has delivered a three-year annualised return of 14.8%. Ongoing charges are relatively high at 1.41% and reflect the extra work which goes into managing the fund. [TS]

---

– EMERGING MARKETS –

WHAT IS THE ATTRACTION OF THIS REGION?

Because they are at a different stage in their development, emerging markets tend to have greater growth potential than the developed world. This is further underpinned by their more youthful demographics, with larger working age populations.

These markets have typically moved on from the commodity drivers and sources of cheap labour and exports they were 20 or 30 years ago and now play host to some of the world’s most innovative companies. This includes the world leading chip maker, Taiwan Semiconductor Manufacturing Company (2330:TPE).

Beyond China (covered separately in this article) the emerging markets space is dominated by other Asian economies like India, Taiwan and South Korea. Valuations are undemanding relative to companies in the West and levels of debt are lower.

WHAT ARE THE KEY RISKS?

Emerging markets can be more volatile, currency devaluations are a fact of life and corporate governance standards can be behind those seen in most Western countries.

This is particularly the case in countries where ownership rights are not as well protected, perhaps because of a lack of separation between the judicial system and a country’s government.

The peaceful transfer of power is more of an issue in emerging markets with political instability something investors must watch.

---

---

THE INDICES THAT MATTER AND PRODUCTS TO TRACK THEM

The main regional indices are MSCI Emerging Markets and FTSE Emerging Markets. They have a key difference because FTSE classifies South Korea as a developed market.

Most ETFs track the MSCI Emerging Markets index, such as HSBC MSCI Emerging Markets (HMEF) which has an ongoing charge of 0.15%. It is possible to get emerging markets exposure excluding China through iShares MSCI EM ex-China (EXCS), with an ongoing charge of 0.18%.

TWO FUNDS WITH DIFFERENT APPROACHES

A top quartile performing fund over three, five and 10 years, BNY Mellon Global Emerging Markets Opportunities (BVRZK93) has delivered a 10-year annualised return of 8%, with ongoing charges of 0.88%.

The fund has a high conviction and unconstrained approach, reflected in the fact India has the largest country weighting  in the portfolio at 26.6% compared with 14.3% in the MSCI Emerging Markets index.

An investment trust with a much lower allocation to China (1.7%) than the benchmark is Utilico Emerging Markets (UEM). Trading at a 15.3% discount to net asset value, the trust is focused on infrastructure investments. It has an ongoing charge of 1.19%. [TS]

---

– CHINA –

WHAT IS THE ATTRACTION OF THIS REGION?

China warrants an allocation in portfolios due to the stock market’s low equity ratings which leave a low bar for upside surprises, and the pent-up consumer demand being released after harsh lockdowns during the pandemic, with themes such as the consumer, green energy and digital spending expected to lead the recovery. High household savings should support domestic demand in populous China, which is likely to see more stimulus measures which would be supportive for equities following downward revisions to 2023 growth projections by major banks and credit agencies. After an economic rebound in the first quarter with GDP growth at 4.5% growth momentum has subsequently softened, prompting concerns about the longevity of the Chinese growth story.

WHAT ARE THE KEY RISKS?

China’s much-hyped economic restart is fading, with S&P Global having downgraded its GDP growth forecast for 2023 from 5.5% to 5.2%, while the near-term outlook for domestic consumption is clouded by weak consumer confidence with youth unemployment at a record high.

The property market is still subdued, while an additional risk is geopolitics, with fraught US-China relations a threat to growth. A considerable number of China’s companies also have many environmental, social and governance (ESG) issues to resolve.

---

---

THE INDICES THAT MATTER AND PRODUCTS TO TRACK THEM

The indices that matter for China include the Shanghai Stock Exchange (SSE) Composite Index, often called the SSI Index, which tracks all stocks traded on the Shanghai Stock Exchange, as well as the CSI 300, considered the blue-chip benchmark for mainland China stock exchanges because it tracks both the Shanghai and the Shenzhen markets.

The MSCI China index is the one most products track. Investors seeking exposure could opt for Xtrackers MSCI China (XCX6) or HSBC MSCI China (HMCA), an ETF that replicates the performance of the MSCI China Index with a competitive ongoing cost of 0.3%.

TWO WITH DIFFERENT APPROACHES

The China-focused investment trust on the widest discount in the Association of Investment Companies’ (AIC) China/Greater China sector, Abrdn China (ACIC), which invests in onshore China companies and those with operations in China and is managed by Abrdn’s 13-member China team led by Nicholas Yeo.

The trust offers exposure to the likes of Tencent, beverages business Kweichow Moutai, online retailer Alibaba and pan-Asian life insurer AIA and reported a materially improved performance for the six-month period to 30 April.

In the funds universe, Matthews China Small Companies (BJN4L97) offers exposure to mid and small caps employing Matthews Asia’s bottom-up, fundamental investment philosophy, with top 10 positions ranging from China Overseas Property and Alchip Technologies to Yangzijiang Shipbuilding. [JC]

DISCLAIMER: Ian Conway owns units in Heptagon European Focus Fund. Steven Frazer and Ian Conway own units in Fundsmith Equity Fund.

---

What if you want globally diversified exposure?

Investors who don’t want single-country funds should explore the universe of global funds and trusts, which offer broad-based global exposure in one product. For example, the diversified F&C Investment Trust (FCIT) has 52.7% of its assets in North America, 13.5% in Europe, 8.9% in Emerging Markets, 6.9% in Japan and 10% in the UK, while Alliance Trust (ATST) is 57% invested in North America, 15.9% in Asia and Emerging Markets, 14.7% in Europe and 9.1% in the UK. In contrast, Brunner (BUT) is lighter on North America at 39.8% of assets, with greater exposure to the UK at 26.3% exposure, with 26.2% of the fund invested in Europe ex-UK and 5.7% in the Pacific ex-Japan region.

A 13% share price discount to NAV (net asset value) at investment trust Bankers (BNKR) presents a buying opportunity for those seeking a ‘one-stop shop’ for global equity exposure through six geographic portfolios or ‘sleeves’. The diversified trust holds the likes of Microsoft (MSFT:NASDAQ), Apple (AAPL:NASDAQ) and JPMorgan Chase (JPM:NYSE), Bankers has achieved 56 years of consecutive annual dividend growth.

Those seeking access to the stock picking acumen of Terry Smith should buy Fundsmith Equity (B41YBW7), the popular global fund benefiting from a return to form of quality growth. The fund is concentrated around a small number of high quality, resilient, global growth companies, with its 26 holdings including Meta Platforms (META:NASDAQ), LVMH (MC:EPA) and L’Oréal (OR:EPA). [JC]

---

 

‹ Previous2023-07-13Next ›