The United Kingdom is one of the most attractive places to invest because of the role the country plays in the global financial market. We will analyze the top 5 reasons for investing in the UK stock market.
- Geographical and Currency Diversification
- Rule of Law
- No Withholding Tax on Dividends
- Attractive Valuations
- Inflation Protection
1) Geographical and Currency Diversification
The first reason why it is interesting to invest in the UK stock market is because it can be thought of and acts as a separate market. While the correlation between the stock markets of Germany, France, Italy and Spain is very high, the United Kingdom, while still somehow correlated, moves more on its own.
This adds additional diversification to our portfolio, thereby reducing its overall risk.
At the same time, from a more macroeconomic perspective, and in the long term, the UK economy is less integrated with that of the European Union. This is due to Brexit and the policies that come from it.
In addition, the United Kingdom has its own currency, the pound sterling, providing our portfolio with greater currency diversification.
Lastly, the UK stock market also includes many foreign companies that trade on the London Stock Exchange. Some of these foreign corporates operate or are headquartered in countries such as Australia, Canada, South Africa o Switzerland. Almost a third of the UK stock market is made up of non-UK companies.
2) Rule of Law
Another reason why we may be interested in investing in the United Kingdom, from a fundamental point of view, is that it is one of the countries with the best rule of law and legal certainty in the world.
This means contracts are enforced, property rights respected, and the rules of the game do not tend to change in the middle of the game.
This is in contrast with the more interventionist European thinking, whereby the general interest, i.e. what the government wants to pursue, receives absolute priority. That ends up causing negative externalities and uncertainty for all economic players, including investors.
In this sense, our investments in the United Kingdom are better protected against regulatory and legal changes.
3) No Withholding Tax on Dividends
Dividends are an important part of the returns that we will receive as stock market investors. This is particularly true if we invest exclusively in individual stocks that pay out dividends, as some funds and ETFs simply reinvest the dividends they receive from companies.
Receiving dividends can be very pleasant. As a famous investor once said: “dividends are outward manifestations of inward grace.” And the United Kingdom is one of the best jurisdictions for companies that pay large dividends.
The largest issue with dividends is taxation. After all, most companies have already paid corporate taxes on the profits made. If shareholders have to pay tax on dividends, we end up with double or even triple taxation. Therefore, we want to minimize that as much as possible.
Most countries apply a so-called withholding tax on dividends. It means they get to keep between 10-35% of the dividends paid. Please note this tax comes on top of corporate taxes and before any individual income taxes.
Luckily, the United Kingdom is one of the few countries in the world that does not apply any withholding taxes on dividends. Consequently, dividends are paid in full to its shareholders, without the British government taking a portion of that.
If you want to learn what other countries do not apply withholding taxes on dividends, check out this link:
Countries With No Withholding Taxes on Dividends
At the same time, many large companies traded on the London Stock Exchange pay attractive and constant dividends to their shareholders.
4) Attractive Valuations
It is often said that there is a bubble in the stock market. That company valuations are extremely high and, therefore, the risk of a crash is significant. It does not matter when you read this as this is something that a good portion of the investor community will think at any time.
But we must ask ourselves what stock market they are referring to when they speak about overvalued companies. In fact, they are usually speaking about the United States.
Several European stock markets trade at very attractive levels. And that has been true for more than a decade. While some of them are trading at very cheap valuations because they face serious economic and demographic challenges, this is not the case for all of them.
The UK stock market, however, is very promising. The United Kingdom has a much more dynamic economy, a younger population, and remains a key jurisdiction for the Anglo-Saxon world and the capitalist economy.
Despite all that, its stock market trades at very low prices. In fact, in 2023, the Footsie 100, the country’s main stock index, is trading at levels similar to those it had in 1999. And those levels are nominal. If we adjusted them for inflation, we would see that, on an inflation-adjusted basis, the UK stock market trades almost 65% below its all-time high.
5) Inflation Protection
Finally, it should also be noted that investing in the UK can be a good way to hedge against the risk of inflation. This is because the UK stock market has large exposures to sectors capable of surviving and thriving in times of inflation.
In addition, these sectors are represented by some of the most recognized companies in the world.
Thus, the British stock exchange has very strong names in the financial (HSBC, Barclays, LSE), energy (Shell, BP), commodities (Rio Tinto, Glencore, BHP), telecommunications (Vodafone, BT Group), real estate (British Land, Segro) and even tobacco (British American Tobacco, Imperial Brands) sectors.
This should not surprise us, as the British economy has historically been more inflationary than that of other developed countries in Europe. Their capital markets have adjusted to such a reality.
If you plan to invest in the United Kingdom, the easiest way is to choose one of the following two options:
On the one hand, you can choose which individual stocks you would like to buy and simply invest in them. Because many of the UK’s large corporations enjoy a solid financial position, it is unlikely you will make big mistake.
The other alternative is choosing an ETF that tracks the stock index of your choice. The main stock market index in the UK is the Footsie 100, but it is by no means the only one. If you want to learn about the UK’s most important stock market indices, visit the following page:
The 7 Most Important Stock Market Indexes in the UK
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