UK-based investors should avoid overexposure to their home market, warns the CEO of one of the world’s largest independent financial advisory organisations.
The warning from Nigel Green, chief executive and founder of deVere Group, which has $10bn under advice, comes as the FTSE 100 touched its highest level for more than 13 months on Tuesday.
Nigel Green comments: “The UK’s leading index briefly reached a 13-month high thanks to surging oil prices and a significant rally from banking stocks.
“However, despite this positive uptick, I would urge UK investors to avoid home bias, whereby they favour those markets with which they are most familiar. Indeed, they should think twice about overexposure to their home market.”
He continues: “There are three principal reasons to be cautious about the UK.
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“First, a near-term worry is that UK stocks appear expensive, based on their current valuations, relative to their history and a shrinking of profit margins across many sectors.
“Second is a weakening domestic economy. The Bank of England expects zero growth in Q4 and in Q1 of 2017, while it now forecasts the economy will be 2.9 per cent smaller by the end of 2019 than its May forecast. The economy will weaken because of a pause in investment and big-ticket consumer spending, and disruption to trade with EU, as we wait to see the impact of Brexit.
“Third is sterling. With a weaker economy and the Bank of England loosening monetary policy, sterling may fall further. A weak sterling flatters export earnings for multinationals, so supports their share prices. But weak sterling also increases the cost of imported raw materials and parts that go into manufactured goods. This increases costs, which companies may struggle to pass on to the consumer as unemployment rises as the economy weakens. Therefore, a weak pound is a mixed blessing.”
The deVere CEO concludes: “Despite, or perhaps even because, of the UK’s rally, UK-based investors need to ensure that their portfolios are adequately diversified – and this includes across geographical regions, as well as assets and sectors.
“The myth that international investing presents a higher risk must be busted. In fact, the more diversified the investment portfolio, encompassing a global reach, the greater the reduction of risk.
“History teaches us that investors who maintain a well-diversified portfolio are best-placed to make the most of opportunities that present themselves, whilst simultaneously mitigating risk.”