The case for getting into the ring with UK equities

The US market: consistently heavyweight

The enormous 64% share of the global market cap that the US has today isn’t particularly unusual. From the late 1940s to the mid-1970s (before the Japanese market soared), the US stayed consistently at a similar percentage to today – occasionally going higher.

While this is well above the US’s current 26% share of global GDP, it’s not surprising as the US has the strongest revenue-generating companies and the most capitalist approach to generating wealth of any country.

Dividing up the global equity pie

Of course, in absolute market cap terms the UK hasn’t actually shrunk. It’s merely that, as the overall global equity pie has expanded, the share represented by London-listed companies has fallen as a proportion of the whole. Below we illustrate how the value of the UK stock market today compares historically. Evidence, if needed, of wealth creation at work.

As investment managers, we must consider appropriate geographical allocations for our clients’ portfolios, so the UK’s starting weight is important.

For over 25 years, PIMFA (Personal Investment Management and Financial Advice Association) has provided asset allocation benchmarks for private client portfolios, by asset type and geography. According to the PIMFA Balanced Index in 2000, the UK equities weighting was 55%. Today it’s a meagre 17.5% (fig 2).

The prime beneficiary of this downward trend has been an increase in international equities, alongside a gentler increase in fixed interest assets.

Fig 2 Benchmark allocation according to the PIMFA Balanced Index (and precursors)

Source: PIMFA

Why has the UK market taken such a sucker punch since 2017?

Two factors are behind this. 

1. UK politics
   Whatever your opinions on the costs or benefits of Brexit and Scottish independence, international investors took a negative view. 
   Sterling fell in 2014 on the Scottish independence referendum and then further after 2016’s Brexit vote. UK investors became less keen on their own assets, while international investors questioned the relevance of investing in UK companies at all.
2. The enormous rise of US technology companies 
   Over the last 10 years (to end February 2025), including dividends, the UK market has risen by 82.7%, a compound average annualised growth of 6.2%. 

Compare this with the top nine companies in the world, all broadly considered technology names and eight listed in the US. On average they have each returned over 4,400% at a compound annual growth rate of 35%. Even excluding the best, NVIDIA, the average growth is 1,375% with a compound rate of almost 30%.

Just three companies (Apple, Microsoft and NVIDIA) are each individually worth more than the entire UK market. The top 10 companies in the world, nine of which are in the US, are together worth more than all of Europe, the UK and Japan combined (fig 3).

Fig 3 Returns of the UK compared with the largest technology companies, 10 years to end February 2025

Source: FTSE, Bloomberg

How do we choose the weightings in our client portfolios?

For UK-focused clients

For a client resident in the UK with liabilities in sterling, who is used to UK regulations and taxes, a reasonable allocation to UK assets is appropriate.

We don’t have technology titans here, but we have lots of well-managed companies with decent outlooks. Also, because we’ve gone through a period when the US was king, relative valuations in the UK are attractive compared with their history and other markets.

So we think in terms of a neutral position, with 20% of equities in the UK and 80% elsewhere. This is similar to, but a little less than, where we believe our UK wealth management peers stand.

For international clients

For clients with no natural bias to sterling, we create global equity portfolios with around 3.5% in UK equities (for a similar neutral risk profile) and more exposure to the big technology companies. 

How do the top 10 equity holdings compare?

In a 20% UK equity portfolio, the weighting to different sectors is much more diversified across the top 10 equities held. Although we have the same top six companies, their weightings are relatively lower – and suddenly you have UK-listed but global names like AstraZeneca (pharmaceuticals), HSBC (global banking), Shell (energy) and Unilever (consumer products) in the top 10 (fig 4). 

Fig 4 Benchmark asset allocation

Source: Canaccord Wealth, FTSE

A knockout blow for Cisco

Be warned: markets get excited about growth themes and bid up prices in companies exposed to them, such as UK railway stocks in the mid-1840s; the 1990s technology, media and telecommunications (TMT) bubble; and now perhaps the artificial intelligence (AI) boom. The technology favourites shown in fig 3 are brilliant companies – but expensive because of their strong performance.

Back in early 2000, people were raving about Cisco, a company providing internet servers and routers. From early 1990 to the end of 1999, shareholders enjoyed a total return of 85,600% – an astounding annualised compound growth rate of 98% every year for a decade. 

But it was extremely expensive. At the end of 1999 Cisco was valued at 13 times calendarised (12-month forward) sales. A multiple of sales – not earnings. 

What happened to Cisco? From early 2000 to the end of February 2025, in sterling terms, it has generated a total return of 132%, compounding at a paltry 3.4% annually. It took until the end of 2017 to turn a profit. Cash would have been a far better investment over the period.

And the UK equity market with all its dull old companies? Even better. From the end of 1999 to the end of February 2025 it has returned nearly 250%. That’s 5.1% every year.

Buy like a butterfly, make honey like a bee

As wiser heads than I have said, the key to success in equity investment is buying great companies at reasonable valuations and then holding them for a long time. Buying great companies at expensive prices is not for us – it produces bigger drawdowns and more volatility than our clients expect and often creates difficult outcomes.

¹ Worldometers.info

Any questions?

If you would like to discuss the asset allocation of your portfolio, including your exposure to UK equities, please get in touch with your usual Canaccord Wealth account executive or email: CGWM_UK@canaccord.com

For further information on any of the terms used in this article please see our glossary of investment terms. 

 

If you would like to know how we can help you to make the most of your wealth, contact one of our experts for a no-obligation, free consultation.

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