Investors exiting from the UK stock market has pushed down valuations to the point where overseas corporates and private equity houses are busy snapping up UK-listed companies.
The combination of undervalued equities with the political stability of the new UK government with a large parliamentary majority makes UK equities highly appealing to more pragmatic investors willing to take risks.
Even when the UK equity market is down, UK investors should still consider retaining some exposure to it as a diversifier. Diversification is key for spreading the risk of investments to ensure retail investors do not lose out from concentrated investments that are underperforming.
By failing to diversify a portfolio, by excluding UK equities, you are adding risk to your portfolio.
We are not arguing that investors go back to the old days of having a home market bias and a big overweight position in UK shares, but there should be some exposure in a balanced portfolio.
But keeping exposure in the UK market alone is not enough – retail investors must ensure they make the right investments. For example, the performance of large cap and small cap varies widely and there are different risks involved with each investment.
It has never been more important for investors to be active and nimble with their allocations.
Previously that has meant increasing exposure to faster growth economies and companies with high-quality earnings such as tech companies. Now, relative valuations suggest at least a foothold in UK equities.
Jonathan Webster-Smith is chief investment officer at Bowmore Asset Management
