There’s no question about it, UK shares have underperformed lately. That is partly due to the pandemic, which triggered a stock market crash in March. However, the UK has lagged rival markets for some years.
Global investors have been spooked by Bexit, which has cast a political and economic shadow for an incredible four-and-a-half years. Even though we leave the EU on 31 December, we still don’t know if we will depart on good terms with a deal, or in a blazing row. Many global investors are waiting to see how things pan out. UK shares have taken a beating as a result.
Domestic investors have also lost their love of UK shares. They’ve declined substantially as a proportion of the total assets we hold in the last 15 years, according to new figures from the Investment Association.
We love unloved UK shares
In 2005, private UK investors held 39% of their assets in equity funds targeting domestic stocks. By June this year, it had fallen to just 14%. Again, the EU referendum is largely to blame, as the fall accelerated since it was announced in January 2016.
Darius McDermott, managing director of Chelsea Financial Services, says the message is clear: “Everyone seems to hate UK equities – even us Brits.” He points to another reason we’ve fallen out of love with UK shares, and this is an interesting one. The FTSE 100 has a strong bias to three sectors, all of which have relatively underperformed lately.
The first is financial stocks, such as the big banks, which have been on the front line both of Brexit and Covid-19 uncertainty. Next, consumer discretionary companies were hit by the squeeze on incomes before the pandemic, and the lockdown afterwards.
Finally, oil and gas companies. In 2005, BP and Royal Dutch Shell generated a third of total profits on the FTSE 100. Today, it’s a paltry 7% today. The decline of these two giants may be the single biggest reason why investors have lost the love for UK shares.
The FTSE 100 could fly again
History shows that investing is cyclical. The time to invest in a company, sector, or market, is when it’s out of favour, rather than riding high. I think now’s a great time to invest in UK shares, precisely because nobody loves them right now.
Sentiment could swiftly change if Boris Johnson does get a Brexit deal. It would be very much like him to cobble something together at the last minute, and proclaim glorious victory.
It may not be the best deal but could still transform investor attitudes, and allow us all to look forwards. If a vaccine followed soon after, UK shares could enjoy a double boost.Â
There are no guarantees. There never are, when investing. UK shares will swing back into favour at some point. I’d buy before this happens, rather than afterwards.