Photo by Maxim Hopman on Unsplash
 

Globally, investors tend to invest more in their own market than in global equities. This is called home bias.
The same applies to the UK as well. People often invest in companies they are more familiar with. This may be because overseas markets can be perceived as riskier and more difficult to access.

aving a home bias is not necessarily a bad thing – it avoids currency risk, and markets are increasingly moving together – no country escaped Covid or the 2008 Financial Crash.

In the last year, UK investors have generally benefited from having a home bias. At the time of writing the FTSE 100 is down 3.13% over the last 12 months. This compares with a drop of 15.45% for the S&P 500 (US), 6.95% for the Nikkei 225 (Japan), 28.26% for the CSI 300 (China), 16.15% for the DAX (Germany), and 9.17% for the CAC 40 (France).

On the other hand, if you look at the UK stock market over a longer period, it has generally lagged behind its global peers in terms of performance.

Take a look at the last five years’ performance. The FTSE 100 is down 6.61% (although dividends have helped a bit) compared to an increase of 50.75% for the S&P 500, an increase of 21.63% for the Nikkei 225, a drop of 12.12% for the CSI 300, a drop of 1.71% for the DAX and an increase of 13.45% for the CAC 40.

Table: Figures correct as of 31st October 2022. Source: www.selectwealth.co.uk
 

Furthermore, the weakening pound has been a boon for overseas investors.

Due to the FTSE’s large exposure to the UK, investors have minimal exposure to ‘New Economy’ tech companies, whilst having large exposure to ‘Old Economy’ stocks such as Shell, BP, and British American Tobacco.

Losing out on the extraordinary growth of some of the big tech companies will have a detrimental effect on investors’ returns.

As an example of how much these companies have grown, Apple now has a market capitalization of $2.5 trillion. In comparison, Shell has a market capitalization of £171 billion ($197 billion), making it the largest company on the FTSE 100. In fact, Apple currently has a greater market cap than all the companies on the FTSE 100 combined.

A high level of exposure to one country can also increase political risk, as evidenced by the recent mini-budget, and may prevent investors from taking advantage of global opportunities.
 

In that case, what’s the answer?

Diversifying a portfolio across asset classes, sectors, and countries should help reduce the volatility of your returns and the risk of being overexposed to one country or sector.

If you wish to increase your overseas holdings but are concerned about the Sterling strengthening, you can consider Sterling-based funds that hedge the currency. Extra fees incurred to hedge currency are usually small.

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