Best of British - Is now a good time to invest in the UK?

A home nation can feel like a natural hunting ground for investors. For a UK investor, a leaning towards holding mostly UK-listed shares and funds is known as having a ‘home bias’.

On the one hand, wanting to support one’s own economy and to invest in brands they are familiar with, isn’t necessarily a bad thing.

However, any passion for holding domestic assets shouldn’t be at the expense of your long-term goals. And more crucially, shouldn’t block you from the potential value of being a diversified, global investor.

Interestingly, money has been flowing out of UK investments in recent years with investors favouring US markets, among others. The popularity of US markets is largely driven by the impressive performance of the big tech firms such as Apple, Amazon and Alphabet.

In response, the Labour government plans to explore initiatives designed to help the UK’s capital markets and encourage more retail investors, which could provide a welcome boost.

What the UK has to offer

Part of the opportunity said to be offered by UK investments today is that they are well-valued in comparison to other markets – such as Europe and the US. That means investors can buy shares in quality UK companies – either directly or through a fund – at a comparably good price.

The level of share prices is just one of many factors to consider when investing. Amongst other things, investors should look at growth prospects and the strategy of a company or fund.

The FTSE 100 – the UK’s main share index – contains the 100 biggest UK-listed companies (by market capitalisation) and includes many household names. You’ll recognise consumer goods businesses including Unilever, creator of brands such as Dove soap and Domestos, and drinks manufacturer Diageo known for Guinness and Smirnoff among others.

There are also energy giants Shell and BP, pharmaceutical companies like AstraZeneca, and mining firms Rio Tinto and Glencore. The index is diverse and also contains large banks and insurance firms.

Certain medium-sized and small UK companies are listed on the FTSE 350, FTSE 250 and the FTSE Small Cap index. There’s also the Alternative Investment Market (AIM) – often referred to as Britain’s “junior” stock market – which is home to the fashion retailer Boohoo and package holiday seller Jet2.

Dividends from UK companies can be attractive

Broadly speaking, investing in UK companies comes with the benefit of exposure to those that pay decent dividends, so can be attractive to investors who want to boost their investment by reinvesting them – as well as those who want to generate income.

UK dividends hit a new record in the second quarter of 2024, according to Computershare’s Dividend Monitor.¹ Please remember though, that past performance is never a guarantee of future performance.

Payouts – boosted by special dividends – rose 11.2% year-on-year to an all-time quarterly high of £36.7billion. The underlying growth rate, which strips out these one-offs, was just 1%, but regular payouts still reached a new record (£32.5billion). Banks in particular are on track for record payouts in 2024, it said.

The forecast for 2024 was reduced – attributed to mining-sector cuts – with headline 2024 forecast cut to £93.9billion, and up overall by 3.8% year-on-year.

Mitigating your currency risk

Owning a slice of UK-listed companies also means that your investment and returns are in pounds and pence. This compares to owning shares overseas where currency fluctuations may affect their value.

Currency swings could go your way and you could make money, but they could also erode the value.

Importance of going global

While backing British businesses offers some comfort of backing brands you recognise, only having UK companies in your investment or pension goes against one of our key messages at Barclays.

We believe that however you invest, it’s important to spread your investments across a range of geographical areas – as well as industries and asset classes. Known as diversification, this ensures that you spread your overall risk. If one part of your portfolio isn’t doing well, the other investments you’ve made elsewhere should (in theory) compensate for those losses. And likewise, having a more diversified portfolio allows you to cast your net wider in the search for returns.

Investing in international markets offers diversification by providing access to sectors that may be under-represented in the UK.

Be aware of your home bias

Luke Pearce, Senior Multi-Asset Strategist at Barclays UK Multi-Asset Wealth, explained: “The familiarity of UK companies can tempt investors to have a disproportionate exposure in UK equities. Investors should be aware that this ‘home bias’ significantly reduces their opportunity set.

“The reality is that UK companies represent a small subset in which investors can choose from – less than 5% of broader Developed Market Equities universe. We prefer a more balanced global exposure, which still includes UK equities, to ensure we’re diversified across the countries, styles, and sectors.”

Going global won’t stop you experiencing losses, but it can help manage that all-important risk.

So, in answer to the question as to whether it’s a good time to invest in the UK – the answer depends on your personal goals, what exposure you may already have to the UK market and whether you believe investing in UK assets could enhance what you’re currently doing. If you think they could, then current UK equity valuations might present a good investment case.

Ready to invest?

Buying shares in a single company can be risky, so to spread that risk you could consider investing in a fund instead, because a fund holds shares in a wide range of companies.

You can build a well-diversified portfolio of funds yourself using the tools available on Smart Investor.

A good place to start is the Barclays Funds List. It is made up of funds from some of the investment sectors and regions we believe are key for building a diversified portfolio. The list includes different types of funds – active, trackers, and our own Barclays Multi-Manager funds – a group of funds run by Barclays' own experts.

Ready-made diversified

If you can’t decide on the right blend of regions to have in your own investment or pension portfolio, then you can leave it to the experts by selecting Barclays Ready-made Investments. These are funds designed by our experts to give you a well-diversified portfolio which will include exposure to the UK as well as other global markets. In a nutshell, you choose what risk you feel comfortable with and our experts do the rest.

There’s a simple choice of five funds, all of which invest in a mix of shares, bonds and cash.