The poor old UK stock market has taken a reputational bashing in recent years. It has been criticised for its poor performance, its low valuations, and for the fact that some of its constituents have deserted it for the US. That stat from the Spring Budget about UK pension funds now owning less than 4% of UK shares has been bandied about again and again.
Such is the popularity of passive investing that stocks in any given country will often all be tarred with the same brush.
There’s no denying the UK’s FTSE 100 index has underperformed its overseas counterparts in recent years, but that doesn’t mean that all UK stocks should be written off. There are a few diamonds in the rough that should be of interest to those with a penchant for investing in individual stocks.
Let’s start by taking a look at exactly why the UK has underperformed by comparing the FTSE 100 to the global MSCI World index. The former contains the biggest 100 companies on the UK stock market, and the latter contains nearly 1500 companies from 23 developed markets. Both indices are market-cap weighted, meaning that the bigger companies are ascribed bigger weightings. If we include dividends, the performances of these indices for much of the last four decades have actually been pretty similar. In fact, the FTSE was in the lead from 1986 to 2019. It was in the pandemic era that the global index pulled ahead, when investors expressed a preference for Big Tech and so-called mega cap companies.
Technology has by far the biggest sector weighting in the MSCI World index, accounting for nearly 24%. How much technology does the FTSE 100 have? Zero.
Instead, it has chunky weightings in mining, oil, and financials, which have all been rather out of favour of late.
If you look at the UK stock market by size, the biggest company in the UK is Shell, worth £169bn. AstraZeneca is close behind with a market cap of £165bn. Both are dwarfed by the giants of the US, where Microsoft is now worth more than three trillion dollars.
The US’ abundance of mega cap companies means plays a big part in its weighting in the MSCI World index. Back at the time of its launch in 1986, the US accounted for 45% of the index. Japan came second with 25%, and the UK took the bronze medal with a respectable 9%.
Today, the US accounts for a whopping 71%. Japan has dropped to 6%. The UK has clung on to third place but now accounts for less than 4%. The UK stock market has become a poor representation of the global economy, and the FTSE 100 therefore should not be relied upon as a basis for building an investment portfolio.
That said, it’s not all bad. The UK stock market does still have some decent companies. The investing buzz phrase of the moment continues to be artificial intelligence, and while the FTSE 100 doesn’t contain any enablers of this trend, it certainly contains some businesses that will benefit from it.
For example, it is now possible to analyse vast amounts of data very quickly, and that should be great news for companies that own a lot of data. The London Stock Exchange is home to Experian, which owns data on over one billion people thanks to its credit bureau roots. It is also home to RELX, formerly Reed Elsevier, which owns the rights to thousands of legal and medical journals.
AstraZeneca demonstrated its prowess in the global race to develop a Covid vaccine, and it continues to impress with its drug pipeline. It’s considered to be one of the world leaders in cancer medication. Finally, mining giants such as BHP Group and Rio Tinto may not be the flavour of the moment, but both have significant interests in copper and will surely benefit from the ongoing electrification of the world.
For those who like to invest in individual stocks rather than index tracking funds, the poor old UK market still has plenty to like.
