Should investors give up on the UK?

4th July 2012

Perhaps they already have, with news of the largest sell-off of in equities for five years. According to Capita Registrars, private investors sold £1bn worth of shares between March and May, as the optimism of early 2012 fades to a distant memory.  

There certainly seems little reason for cheer. Europe remains unfinished business, and while it appeared that trust in the UK's high street banks couldn't fall further, news breaks that Bob Diamond has resigned after the rate-rigging scandal.

But is the pursuit of profit still worthwhile on home soil?

According to asset managers Schroders, the patriotic bubble has well and truly popped – despite the Diamond Jubilee and Wimbledon.

Almost nine in ten UK investors expect various financial issues to cause them concern over the next year. Their biggest worry is the impact of inflation with more than one in four investors also concerned about how they will cope with the prospect of rising taxes and austerity measures, according to the Schroders European Wealth Index.

But what might boost the market?

As the bad news keeps on rolling, there is the prospect of yet more QE.

If the Bank of England decides to pump another slug of monetary stimulus into the economy, the markets will respond accordingly. The good news is that, at least in the short-term, the market reaction is likely to be positive. The previous injections into the economy have certainly proved so – even if long-term it is not the solution for embattled investors.

Which stocks will help?

Whichever way you decide to broaden the scope of a portfolio, one particular investment strategy which has been in vogue over recent years and will likely remain that way until there is further clarity in equity markets is investing in the shares of defensive companies – and the UK has plenty.

A defensive company is one whose sales and earnings remain relatively stable during both economic upturns and downturns. Take, for example, British American Tobacco. Its shares demonstrate low levels of volatility when compared to the market.

And Darius McDermott, managing director at Chelsea Financial Services and Mindful Money blogger, adds: "The larger UK blue chip companies are more mature businesses, with the cashflow that allows them to pay out dividends.

"Compared to the low income environment elsewhere, they can pay dividends of 3, 4 or even 5 % a year."

If you consider some of the stalwart stocks in your portfolio, the benefit of those from the UK is their defensive, global, dividend-paying nature – so as the economy deteriorates, they remain firm. After all, a large proportion of companies operate in areas where spending is non-discretionary, such as utilities, food and healthcare.

The UK market has started to outperform global equities in recent weeks, and downgrades have been smaller than in the rest of Europe and the US.

And consider the valuations…

It's vital to consider the amount you pay for UK shares, as this will determine your future returns. And the good news is that the UK market remains relatively cheap, and robust dividends, so you stand yourself in good stead if you pick the right companies.

However, UK Value Investor John Kingham argues on a Mindful Money blog: "To get a really cheap market (consider) 2009, when the market hit 3,500 for a second time.  

"But by this time the market had grown, due to inflation, population growth and the general forward march of capitalism, so that in 2009, the FTSE 100 at 3,500 gave a CAPE valuation of around 9. Finally then, we had a market that was, very likely, cheap by any reasonable measure. And the returns from 2009 have born that out.

"The problem here is that waiting for a bear market can be a very long and boring game, requiring the patience of Job. In fact, I think it's likely that there wasn't an attractively valued FTSE 100 from between 1983 and 2009."

But even so, there are always attractive valuations to be found – just do some digging.


More on Mindful Money

Debunking UK economic myths

The rise of innovative state capitalism

Bob Diamond – The King is dead

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The Financialist

29 thoughts on “Should investors give up on the UK?”

  1. Andy Zarse says:

    Shaun, I can only add an Americanism; Yeesh!

    Or as my old granny would say, Dear god and little green apples… she’d be tempted to add There’s none so deaf as them as won’t hear.

    PS I was speaking to a pal from Yorkshire yesterday, and he kept saying t’ instead of “the”. As in trouble at t’mill etc. Anyway, it occured to me that perhaps Sn Barroso might be affecting a Yorkshire accent when he says” Portugal is on t’rack”…

  2. forbin says:

    Hello Shaun ,

    Gerry mandered self employment figures that reduce the top level figure may impress the BBC but not me. As you stated , and has been stated here before by others, the unemployed are being “offered” self employment and the bonus of credits to get them off the unemployment list

    not that I blame the current Gov. , they ‘ve always fiddled the figures even before Saint Maggie The Mad !

    Watch to the next one – pension age raised to 70 but you’re not counted as unemployed still from age 55 ……

    Soon the unemployed will be people aged between 30 and 35 who have been out of work for 6 mths ( because you have redundancy money ) but less than 12 ( on a scheme now ) ….

    The real indicator is that real wages for those not in the top 5% are falling and the tax they paid is also failing with it …..

    But so long as the Banks are ok , and our house prices haven’t crashed – so we must be wealthy , aren’t we ? well , aren’t we ?

    The green shoots of recovery have just been identified as, erm , mold on the corpse ……


    1. DaveS says:

      Hi Forbin

      Thats the great myth – ” we must be wealthy”.

      I often read the private indebtedness doesn’t matter because its matched by private assets !!! Just look how much my house is worth – ha ! The banks pull the same trick – just look how much our mortgage book is worth !

      As you said – the (deluded) drunk will stagger on for some time yet.

    2. Justathought says:

      Hi Forbin,

      Would it be, the word recovery meaning in fact destruction of the paradigm we lived on for so many decades (Decades of false assumptions/beliefs nicely entertained, such as the plague of economic
      myopia…)??? At last with what is presently happening, people are
      realising the futility for producing waste (throw away toys), to live
      within a… me too… (Keeping up with the Jones…) mentality and worse of
      all, pushing our egoistical collectives’ debts into future

      Maybe humankind will at last civilize itself!

    3. Patrick says:

      Class, your green shoots gag, and the Yorkshire one above – funny feedback today. :)

    4. Anonymous says:

      Hi Forbin
      I see you have a few replies so I will just point out that I saw an episode of Yes Prime Minister in which it is assumed the unemployment figures were fiddled. I looked it up and it was thirty years ago! More grist for your mill…

  3. max says:

    We are being screwed by these morons.
    I would PUT THEM ON TRIAL FOR TREASON if i could.

    1. the_minder says:

      you can’t – they own you

      the minder

      1. Anonymous says:

        Hi Minder and welcome to my part of the blogosphere.

  4. DaveS says:

    As I commented the other day, I believe there is a big distortion in the employment numbers caused by benefit claimants switching from Job Seekers Allowance to Working Tax Credits. This was particularly true for over 50 year olds who benefited from extra tax credits (although this is changing in April).

    This had led to lots of fake self employed claiming they work 30 hours a week (i.e. full time) – the threshold for WTC..

    There is also a genuine growth in part-time workers – mainly because WTC makes it possible to work a few hours a week, claim WTC and be no worse off than if you claimed JSA. Its worth doing a crappy, low paid job a few hours a week to avoid the unpleasant hassle (if not bullying) of the local Job Centre.

    You may agree with the principle of forcing unemployed people to do low-paid, low skilled jobs – on some level I suppose I do too. But I suspect what is really happening is that full time employees are being replaced by larger numbers of state subsidised part-time employees on much lower wages. Its the likes of Tesco, Sainsburys and Poundland that are really benefiting – the government is helping to subsidise their profits. The 30 hour WTC trick is being used to disguise low paid part time workers as full time self employed “entrepreneurs” supposedly leading the economic recovery.

    The flip side is number of hours worked is apparently rising whilst GDP is stagnant – to an economist this means productivity is dropping which is a bad thing – in reality those extra hours of labour are spent watching daytime telly.

    Somebody commented on the fact that HMRC are clamping down on fraudulent tax credit claims. This may be true more recently, but I think the numbers above speak for themselves. Its also clear why self- employed incomes are dropping so rapidly compared to others – the fake self employed with little or no incomes are dropping the average.

    I somehow doubt the HMRC will be allowed to try too hard for fear of messing up the one bright economic headline the coalition has left.

    1. Anonymous says:

      Hi DaveS
      You make some good points as otherwise how do we end up with 1700 applicants for barista’s jobs at Costa Coffee? However I would caution against placing too much faith in HMRC as it has been lead by clowns too which I think is a contibutor to the way corporate tax seems to have become voluntary in some cases.

  5. ernie says:

    Thanks for a good hard-hitting post Shaun. Weak media commentary on their performance just lets them off the hook all the time so it’s nice to see economic lunatics exposed for once. As I’ve said before, all we are doing is using a soviet central planning of money as our way of progressing forward. It’s never worked and it won’t now. These “experts” know nothing at all and have been wrong on every policy they have enacted for many years now.
    As to employment, I find it puzzling. My own experience (family,friends) is that employment is quite hard to come by and wages offered are usually lower than they were, say, 5 years ago. The story about Starbucks Nottingham this week seems to belie the rosy figures. Maybe, as other posters have said, the answer is in the fake self-employment or full-time actually comprising lower hours than previously?

  6. economymad says:

    Perhaps it is because that all of these ‘new jobs’ are part-time and low paid that they are topped up with benefits such as Working tax credits, housing benefits? etc so all these new jobs are still sucking money rather than the employees actually contributing to the tax pot.

    The thing is that its more difficult than ever to support yourself with a low paid job – How sad the uk has become. I can’t see any current policies that are going to change anything.

    1. DaveS says:

      Yes, just more part timers claiming more benefits for work done previously by full time employees that claimed less or no benefits.

      Who benefits from that ?

      The big picture is that the economy can only create low paid, service jobs and the workers need to be bribed by the government in order to accept the wages. Mervyn is paying the bribes.

      At least I have a fantastic choice of “Express” supermarket stores – Tesco have just opened yet another one around the corner, no doubt staffed by the tax credit poor.

    2. Anonymous says:

      The bottom quintile of UK households receives more in cash benefits than it earns in gross income. And that’s before the hidden, non-cash benefits like health and (possibly) housing benefit. Net taxation is a foreign concept to millions in the UK, even allowing for indirect taxation like VAT and duties.

  7. Ian.Jones says:

    General wages will need to fall to match those of China and India, I guess the BoE would prefer this is faster through currency and inflation rather than nominal wage cuts. Obviously those with capital and assets grow richer but Merv has an indexed linked pension so isnt too fussed.

    1. forbin says:

      Western world fall to their level or they rise to ours , and only the “good” ones – nice middle / upper class types!

      Capital assets are always preferred – ask the Duke of Westminster !

      We’re on that road to the Middle Ages ….


    2. Anonymous says:

      And which index is it linked to? You guessed!

      1. Anonymous says:

        Yes the one which apparently isnt up to international standards! (RPI) Surely the Bank of England and Mervyn King would want their pension to be indexed to inflation in line with international standards?

        1. Andy Zarse says:

          Ah yes, but that is a matter which can only be addressed properly by the board Trustees of the Court of the Bank of England pension scheme. In 2010 they switched 94.7% of Merv’s pension pot into index linked gilts, which are linked to RPI naturally… surely, if they’d believed the Bank’s fears about terrible defaltion they would have steered well away from this asset class? Insider dealing, you say? How dare you!

  8. JW says:

    Hi Shaun

    Excellent stuff again.

    No doubt combination of ‘part time self-employed’ and credits is behind these manipulated figures.

    Re UK stock market movements, I suspect that we are seeing the same as occurred in Japan, as the currency devalues against USD, the market prices go up to compensate. So Euro strength against USD means little movement in EZ stockmarkets.

    We are all increasingly playthings of Ben.

    1. JW says:

      NB Public pay still increases as a result of automatic pay scales

      1. Noo 2 Economics says:

        Hi JW, I am an ex Public Sector worker having escaped over 5 years ago (Yahoo!).

        I can assure you that my old employer (DWP) only allowed pay scale advancement occasionally since approximately 2003. Moreover, it has not been allowed in the DWP since 2007 except in the case of DWP employees on wages of under £15000 pa (of which there are many!). My information source is currently serving DWP staff who I know.

        For the record for all on here, DWP pay has increased 2% since 2007, of course this has been accompanied with increases in National Insurance of 2% and increases of pension contributions to the erm “non contributory pension scheme” of 1.4%, notwithstanding the generous tax threshold increases from which everyone has benefited.

        1. JW says:

          Hi Noo 2
          Perhaps your source should contemplate moving from DWP. Just checked other civil service grades, HMRC, teachers, local govt; they are all still merrily advancing people up scales, subject to ‘performance’ of course. The 2 year freeze has in general been anticipated with the prior increase in numbers which have been allowed to decrease again to keep within overall totals.

          Just what Sir Humphrey would have planned!

          1. Noo 2 Economics says:

            Hi JW, I hope you’re still following this as I don’t want to post this on today’s blog because it’s unrelated but I’m intrigued. Can you supply the links you have viewed, the only one I found is this – which you will note is only allowing scale progression for those on salaries of less than £21000 pa (admittedly better than DWP’s £15000 limit). The thing is, it’s not all of them, it’s the relatively low paid ones. I’m not getting drawn on performance pay otherwise I can post a book on banker’s “performance pay” and they are of course private sector.

            I don’t understand ” The 2 year freeze has in general been anticipated with the prior
            increase in numbers which have been allowed to decrease again to keep
            within overall totals” are you talking about pay levels, staff numbers or overall pay bill?

    2. Anonymous says:

      Hi JW

      Thank you. The current central banking mantra is that as long as your asset classes aka equities are rising all is right with the world. Well in their inner circle anyway!

      Your view on equity markets being subject to the currency wars too made me look at the UK and Europe as I had been only relating it to Japan. And yes FTSE 100 up 8% in 2013 with £ down 6% versus the US Dollar whilst the Eurofirst 300 is up only 3% with a currency that even with today’s fall is just up versus the US Dollar in 2013.

  9. Rods says:

    Hi Shaun,

    Another excellent blog.

    With people that are self employed, some I know are underemployed, but many have plenty of work but at much lower hourly rates than they were charging a few years a go. Some of course are suffering from both!

    It is interesting that people are being forced into being self-employed and I wonder how many are proactively trying to find additional work and if they will succeed if and when the economy picks up or will just continue to be a drag of the public purse? I suspect if it is mainly the over 50’s that have been made redundant after working many years, then with many it will be the former, where they want a high income again.

    1. Anonymous says:

      Hi Rods and thank you.

      We will find out a little more tomorrow as I have been waiting for these public finance figures in particular. Why? In the UK it initially takes a while before the self-employed pay income tax and natioanl insurance as they start in arrears and catch up. So will there be any signs of that tomorrow?

  10. economymad says:

    One question that I keep on asking myself is that Shaun manages to find time to write a good detailed factual blog almost every working day but the business correspondents of the BBC particularly Stephanie Flanders (I’m not going to criticise Robert Pestons recent contributions due to his recent tragedy in his private life)
    However I do believe that the BBC is not giving us the true unbiased picture, so blogs like Shauns are very much appreciated and at frequently big eye openers to what is actually happening.

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