Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
Investing: Should you reduce your exposure to UK assets?
Karl
29th Jan 2024
If you’re a British-based investor, it’s possible your portfolio is heavily invested in UK assets.
But is this necessarily a problem? And, if so, how can investors reduce their exposure to the UK?
Scroll down for all of the details, or click on a link to head straight to a specific section…
Understanding your exposure to UK-based assets
Is it a problem to have too many UK investments?
How can investors reduce their reliance on UK investments?
Understanding your exposure to UK-based assets
The first step to determine whether you’re overly invested in UK assets is to roughly assets how much of your current portfolio is made up of UK investments.
For example, how many stocks do you own that are listed on UK-based exchanges, such as the FTSE 100? Do you hold any funds, such as exchange-traded funds (ETFs), that are heavily reliant on the UK?
It’s worth knowing that many popular ETFs do have a UK bias. Vanguard’s ‘LifeStrategy’ Fund, for instance – one of the most popular ETFs among British investors – holds roughly 25% of its shares in the UK. Meanwhile the bond portion of this fund aims to hold 35% in British bonds.
And don’t forget, UK-based assets doesn’t just refer to equities and bonds. Property, cash, your pension… it’s worth counting up all these assets to determine your general exposure to the UK market.
Also bear in mind that even if you’re fully invested in the FTSE 100, then you probably already have some exposure to non-UK assets given that so many constituents of the index are now owned by overseas firms.
Is it a problem to have too many UK investments?
Having a portfolio that is heavily dependent on the UK isn’t a huge issue on its own. After all, the UK market has historically been a stalwart of stability, at least when compared to some other regions of the world.
That said, if you hold a portfolio excessively exposed to the UK then it’s worth understanding the risks of this position.
Let’s take a closer look at these risks…
Risk 1. The economy.
One risk of holding too many UK assets is perhaps the most obvious: The health of the UK economy.
If your portfolio consists solely of UK-based assets then, chances are, your portfolio will soar should the UK economy do well. Yet on the flipside, if the UK economy starts to struggle – especially compared to the rest of the world – then it’s likely the value of your investments will tumble. This is because when the UK economy slides investors are incentivised to dump UK-based assets in favour of greater opportunities elsewhere.
And while economic forecasting is a thankless job, there are murmurings that the UK economy isn’t in the best of shape right now…
At the tail end of last year, it was reported that the country is at risk of a recession following the release of figures that reported UK Plc actually shrank between July and September 2023. In addition, we all know that the UK’s inflation problem is still very much with us, despite the fact it’s (finally) starting to fall.
Risk 2. Political uncertainty.
As well as the economic risks, another drawback of being overly reliant on the UK when investing is the general risk of political uncertainty.
It’s all but certain we’ll see an election called this year. Elections can cause uncertainly among investors, as no-one really knows the direction the next Government will take us on.
Will a new Government be kind to businesses? Will they raise taxes? If they’re big spenders, will this have a harmful impact on inflation? Of course, these questions will remain unanswered until we know the next resident of 10 Downing Street.
For investors with a portfolio heavily exposed to the UK, the outcome of the election is likely to have a huge impact on the value of their holdings – whether they’re interested in UK politics or not!
Risk 3. The value of the pound.
Another risk worth mentioning is the performance of the pound.
For example, if sterling weakens this year then this will make UK exports more competitive. This is why a sliding pound can actually have a positive impact on some UK-based businesses.
Yet despite this, a weaker currency can also exacerbate inflation which can have a negative impact on the general economy. Meanwhile a weaker pound also leads to higher import costs, which can drive up costs for businesses which have to buy overseas goods.
This is why a weaker or a stronger pound, can have different impacts on UK-based businesses. And while investors cannot control this variable, the fluctuation of the pound is another risk to be aware of.
How can investors reduce their reliance on UK investments?
If you’ve come to the conclusion you may be overly invested in the UK, then you can reduce your reliance on British-based investments through diversification.
Diversification refers to spreading your investments across different assets, sectors, and…. regions!
So, if you’re interested in ‘deUK-ifying’ your investments, then you may wish to consider exploring investment opportunities beyond British shores.
One way to do this is to buy stocks and shares in non-UK listed exchanges. US-based investments (see how to buy US shares in the UK), shares listed on European exchanges, plus investments in emerging economies are all options.
Plus, if you’re keen to invest in a fund, then buying a global index tracker is another way to give yourself greater exposure to the rest of the world. Two examples include the HSBC FTSE All-World Index Fund C, and the Vanguard FTSE All-World ETF.
Remember, by investing in non-UK assets, besides hedging against the performance of the UK, you’re also giving yourself the opportunity to tap into the growth potential of other economies. And while you may be inclined to invest in emerging markets for the exciting growth prospects that come with it – such as India, which certainly has huge potential might now – putting a larger proportion of your wealth into regions with stable economies and established industries is a route that carries less risk.
To learn more about the benefits of mixing up your portfolio, see our article that highlights the importance of diversification.
Don’t forget to monitor your portfolio…
Building a diversified portfolio is not a one-time endeavor; it requires ongoing monitoring and rebalancing.
This is why it’s important for investors to regularly assess their portfolio’s performance and adjust allocations as needed. For more on this, see our article that explains the importance of asset allocation.
Keep in mind that should you choose to sell a variety of UK-based assets today, fluctuations in asset prices over time may result in your portfolio deviating from your intended exposure to UK-based stocks.
This is why keeping a close eye on your portfolio, and being open to rebalancing can help ensure your investments remain aligned with your risk tolerance and investment goals.
Do you want to learn more about investing? To keep on top of the latest developments in the investing world do sign up to the fortnightly MoneyMagpie Investing Newsletter. It’s free and you can unsubscribe at any time.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. Companies listed above are not necessarily endorsed by Money Magpie. When investing your capital is at risk.
Subscribe
Login
0 Comments
