In contrast to the impressive consistency of our top athletes, investing has been something of a rollercoaster ride over the last few years with some notable highs and lows. Until recently I have advised against excessive optimism, but now there is a growing consensus that the outlook is generally improving and the British economy is turning the corner. Confidence amongst small businesses jumped in the last 3 months to its highest level since 2010 according to a survey published this week by the Federation of Small Businesses. House-building and construction also appear to be picking up, which is helping to support the economic recovery.
Despite the economic difficulties of the last few years, it is interesting to note that UK shares, including dividends, have delivered an annualised return of 9% pa over the last ten years, compared with 7.5% pa for global equity markets. As well as supporting the argument for patriotic investment, this statistic demonstrates the importance of distinguishing between economics and investing, where valuation and market sentiment are key factors.
In addition, only about 30% of annual sales generated by quoted British companies derive from the domestic economy – nearly 70% comes from overseas. This means that the UK is truly a global stock market, allowing investors to gain exposure to numerous famous brands and access to growth in the USA, continental Europe, as well as many faster growing Asian and emerging economies. There is the additional benefit of strong corporate governance in the UK, respected accounting standards and generally progressive dividends.
So, whilst I would always encourage investors to be broadminded with regard to global opportunities, the UK market is an excellent place to start when building a portfolio, particularly if large multi-nationals are combined with an appropriate selection of medium and smaller companies.
To complement the improving investment environment, pension savers who have opted to keep their funds invested instead of buying an annuity will benefit from a rise in the income limit from October to its highest level for two years. This change means that a 65-year old with £100,000 pension fund moving into drawdown next month would be set a maximum annual limit of £7,320, more than 5% higher than the current limit. This uplift is due to an increase in gilt yields, which have moved higher as markets anticipate a tapering of the economic stimulus, known as Quantitative Easing (‘QE’). However, existing investors may have to wait to take advantage of this change unless their pension scheme gives them flexibility to do so. New retirees purchasing an annuity should also benefit from an improved pension as rates have ticked higher.
[Matthew Clark, Western Morning News, 19 September 2013]