The UK news headlines have been even more inward-facing than usual in recent years, with a seemingly endless sequence of referendums on Scottish independence and Brexit, interspersed with general elections in between and all the usual economic ups and downs.
So it’s understandable that UK investors can often get distracted by what the FTSE 100 is doing, at the expense of keeping a global outlook in their investment portfolios.
There are several reasons why this can be a bad thing.
First of all, it’s easy to be more distracted by bad news, leading you to become even more blinkered towards British investments at times when the economy is struggling – the very times when it may pay to look elsewhere.
Second, some of the biggest brands and most lucrative industries on the planet have little to no presence in the UK. We are after all a small island with limited resources, so you have to cast your net further afield if you want to invest in certain sectors or commodities.
And third, a portfolio built on a solely domestic strategy lacks diversification, putting you at greater levels of exposure to shocks in the UK investment market that could otherwise be hedged by investing in emerging markets where growth is stronger.
The Conservative gains in December 2019 mean Brexit is now likely to proceed at pace – not just the UK’s initial departure from the European Union, but the negotiations of the future relationship and the first trade deal between the two as well.
While this brings more confidence to the markets in one sense, it is still also very difficult to predict what will happen in the coming months and years.
So just how much exposure should you have to the UK economy in your personal portfolio?
Play by numbers
If you look at the numbers objectively, the British stock market accounts for about 6% of global value.
You might argue therefore that this is the rate at which you should invest in UK stocks – around £1 in every £16.50.
But there are good reasons to put more of your funds into the UK. You’re probably not looking to create a completely global portfolio with perfectly proportioned investments in every country of the world.
You’re probably much more familiar with the UK economy and especially with the brands on the FTSE 100 than you are with any other index or market of the world.
And it’s perfectly possible to invest within the UK but buy into multinational organisations that give you more of an outward-looking exposure to profits made overseas.
Thinking about Brexit once again, and following several years of Deal or No Deal doubt, the course of 2020 is likely to bring increasing certainty about the shape of the future trade deal between the UK and the EU.
Importantly though, it should also give the first clear ideas of what the UK’s future trade arrangements will be with major non-EU economies like the US.
As these become clearer, they will provide opportunities to reassess your portfolio, especially in key British industries, and decide whether to keep those funds in domestic stocks or move them into assets with more international exposure.
Lessons from the past
What if Brexit triggers a political crisis in the UK – if indeed you don’t think it already has?
Since the end of World War II, there have been several occasions when Britain has faced political turbulence to an even greater degree than usual.
Examples include 1967 and the devaluation of the pound; 1974’s indecisive general election in February and return to the polls in October; and the 1992 crisis surrounding the exchange rate mechanism.
In each of these instances, domestic stocks rose substantially in the following year or so. The implication is that when British chips are down, domestic investors see the UK markets as a safe bet to recover.
At present we’re coming off the back of a prolonged flat period triggered by the global recession in 2007-08 and lasting for a decade since.
But at the same time, British stock prices are not undervalued. So while there is always value to be found through careful choice of investments, the market as a whole is hardly poised to deliver eye-watering gains in a matter of months.
What to do next?
The basics of what to do next are largely the same as at any other time: consider your current exposure, calculate your risk, and be ready to take full advantage of emerging trends and changing value.
Any major announcements relating to Brexit, the relationship with the EU and trade deals with third countries could all trigger a rise or fall in the markets, so decide whether you want to ride out those bumps in the road or try to capitalise on short-term price patterns.
If you’re happy with how much of your portfolio is invested in British-based stocks, you could consider holding on to those and leaving them relatively untouched in 2020 while the trade negotiations are taking place.
With a globally distributed portfolio, you could spend the coming year looking instead at your overseas and multinational investments.
It’s the perfect excuse to do this if you’ve previously been quite inward-looking toward UK investments at the expense of making the biggest profits possible from abroad.
By the end of 2020, you might find you’ve generated significant additional value in your global portfolio, putting you in the perfect position to diversify further geographically, or to reinvest those gains in the UK if the economy shows a strong upward trajectory in 2021.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.