Conal Gregory: Don't miss out on exciting opportunities in the UK

It is easy to keep looking over one's shoulder at the economies of China, the US and emerging nations without realising the exciting opportunities for investing in the UK.

The City of London skyline Photo: Jonathan Brady/PA Wire

Start by looking at your existing exposure which may be directly in savings but also through a pension in order that there is balance and good diversification. Investors often feel more comfortable opting for companies they have heard of and whose products and services they may already buy. There is also less currency risk when investing in shares denominated in sterling.

Many of the leading companies listed on the London Stock Exchange generate much of their revenue from overseas and so the trading is not directly related to the UK economy. This is estimated at 75 per cent for the top 100 London-quoted companies and around 50 per cent for the top 250 firms.

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The UK stock market has performed exceptionally well over the past nine years. In March 2009, the FTSE 100 Index stood at 3,530 and, despite a fall back in recent weeks, it currently stands around 7,000. Investor returns are likely to be even better as savings benefit from dividend payments as well. Over a decade, this index has risen 24 per cent but by 80.5 per cent with dividends reinvested.

Despite the froth of equity prices coming off, “many UK shares are still looking quite expensive”, warns Kelly Kirby, chartered financial planner at Chase de Vere in Leeds, part of Swiss Life. Stocks perceived to be ‘safer’ have shown their popularity and are priced at a premium.

Against this backdrop, there remains much uncertainty, largely associated with Brexit, but also escalating debt levels, Chinese banking concerns, Russian responses to the Salisbury incident and actions of President Donald Trump.

With rising inflation and virtually no wage increases, household expenditure fell last year to 1.7 per cent – its lowest growth since 2011. It would have fallen further if households had not used their savings which have never been so low at 4.9 per cent of earnings.

The UK is at the bottom of the G7 league table for growth but despite the prospect of short-term volatility, most advisers are confident on the long-term prospects of the UK economy particularly if free trade deals can be signed.

Critics of the EU trade policy refer to its cumbersome nature which requires consent among all member states. Cutting or eliminating tariffs would mean less expensive imports.

Whilst there is now under 12 months of EU membership, investors could concentrate on those sectors of the UK economy less likely to be directly affected by withdrawal. Aerospace – with such heavyweights as BAE Systems and Rolls-Royce – works under terms agreed with the World Trade organisation.

However, there is no WTO framework for airlines which may lose their ‘Community air carrier’ designation. Banks with virtually no international business – such as Lloyds and Yorkshire – should be unscathed whilst insurer providers have set up offices abroad to protect EU trade, such as AIG, Hiscox and RSA in Luxembourg.

On the plus side, infrastructure providers should be pleased by the Chancellor’s decision to increase public spending if the budget deficit continues to fall. In February it fell to the lowest that month since 2008.

Industries to probably avoid are agriculture, catering and housebuilding as they are heavily reliant on EU labour. Currency concerns have led several manufacturers to relocate production whilst many non-food retailers are worried about intellectual property rights.

From a growth perspective, Carolyn Black, associate director of investment manager Myddleton Croft in Leeds, has identified oil and mining as two areas which are easily accessible and have fundamental similarities. “Global oil and mining groups have been actively trimming their cost bases recently in the light of economic uncertainty and unsettling global politics,” she says. In turn, this has boosted margins and improved efficiency.

A fund reduces risk and cuts volatility. For a closed-end one where investors buy the shares at a known price (as opposed to open-ended like unit trusts which can expand or contract at will), two UK sectors have shown good growth over 10 years:

UK all companies, up 171.9 per cent

UK smaller companies, up 252.6 per cent.

According to the Association of Investment Trusts, using Morningstar research, the top performers in each sector were JP Morgan MidCap, up 229 per cent, and Standard Life UK Smaller Companies, which rose an amazing 391.7 per cent. In each case, the results show the benefits of a star manager who has the experience and insight to pick the right stocks.

Investment trusts have two other benefits over open-ended: they can borrow when a good opportunity occurs, known as ‘gearing’, and can hold over surplus income to even out dividends. Most also have independent boards of directors to look after the interests of shareholders.

The cheapest way to invest is through a ‘passive’ fund which seeks to replicate a published index. This is the recommendation made by the legendary US investment guru, Warren Buffett, for his holdings after his death.

However, following an index can lead to an unbalanced portfolio where there is too much invested in two or three fields. The FTSE 100, for instance, is formed of 24 per cent financials and 11 per cent gas.

Probably the most reliable tracker for this market is Legal & General’s UK Index which follows the FTSE All-Share. Its costs, both initial and ongoing, can be reduced by going through a discount broker like Chelsea Financial Services, Financial Discounts Direct and Hargreaves Lansdown.

UK funds usually compare their performance with the MSCI UK All Cap index, which last year delivered a total return of 13 per cent. “Returns were especially good among smaller companies, an environment that favours active fund managers who often invest more heavily in this part of the market than the benchmark indices which are dominated by the very large multinationals,” reveals Jason Hollands of Tilney.

Among smaller company collectives, six stand out: Artemis UK, Jupiter UK, Marlborough UK Micro Cap Growth, Old Mutual UK, Old Mutual UK Smaller Companies Focus, TB Amati UK.

For over 20 years Bestinvest has researched open-ended collectives and termed the phrase ‘dog fund’ for the persistent under-performers.

In this context it cites Aberdeen UK Equity which has returned only £125 on £100 invested over three years. Instead Bestinvest makes ‘pedigree picks’ and shows how much an investor could have made on the same basis: Liontrust Special Situations (£154), LF Lindsell Train UK Equity (£150) and Threadneedle UK Equity Income (£149).

When buying collectives, look at the underlying shares and sectors to ensure there is not too much overlap. Fund titles may appear dissimilar but can be surprisingly close in composition. Look, too, beyond ordinary shares and consider other equity assets, notably bonds, to gain diversification.

Finally, some companies are founded to benefit by disrupting existing businesses. One such tipped by Lee Gardhouse, chief investment officer at Hargreaves Lansdown, is Purplebricks.

This firm uses technology to disrupt the traditional estate agency trade. Although it is a relative newcomer, it already has a market capitalisation several times that of Countryside, an established player in this market.