This podcast isn’t personal advice. If you’re not sure what’s right for you, seek advice. Tax rules can change and benefits depend on personal circumstances.
This podcast isn't personal advice. If you're not sure what’s right for you, seek advice. Investments rise and fall in value, so investors could make a loss. Past performance is not a guide to the future.
Podcast transcript
Susannah Streeter: Hello and welcome to the Switch Your Money On podcast – with me, Susannah Streeter, Head of Money and Markets.
Sarah Coles: And me, Sarah Coles – Head of Personal Finance.
Susannah Streeter: As usual, we’ve raced into the studio again to record this episode of the podcast – and racing upwards has been a bit of a theme on financial markets, of late.
Wall Street has raced up to fresh record highs, and investors are showing a lot more love for the UK too, with markets reaching record levels in recent weeks.
So, we thought it would be a good time to focus on the UK stock market in this episode of the podcast, which we’re calling ‘Home Advantages.’
Sarah Coles: We’re going to talk to our Head of Retirement Analysis – Helen Morrissey – about how pension funds view the UK market right now.
We’ll hear from Sophie Lund-Yates – our Lead Equity Researcher – about some individual shares to watch – and our Head of Investment Analysis and Research, Emma Wall, is gonna be here with funds to keep an eye on in this space.
Plus, we’re also gonna take a dive into investor behaviour with Nathan Long. He’ll tell us about some of the results of a special edition of the HL Savings & Resilience Barometer, which explores a bit about how we’re investing and what we might be missing!
Susannah Streeter: But first, let’s take a look at the ride the FTSE has been on.
Stocks have had a spring in their step, as prospects have brightened for the UK economy, especially with interest rate cuts eyed on the horizon.
Geopolitical tensions pushed up commodity prices – boosting mining stocks – but concerns about an immediate widening of the conflict in the Middle East have dissipated, which also appears to have helped calm investor nerves – adding to more positive sentiment.
Sarah Coles: The prospects for global trade are also looking up. With red-hot inflation having cooled down sharply, economies have proved more resilient than had been feared, with the OECD (the Organisation for Economic Cooperation and Development) now forecasting steady global growth for 2024 and 2025, even though it’s set to remain below its longer-run average.
Susannah Streeter: So, what next for UK shares?
Well, companies listed on the London Stock Exchange are still considered to be undervalued, despite the recent run upwards. The UK market has been trading near a 43.5% discount to its US counterpart, based on forward price-to-earnings ratios. That’s the biggest discount in more than 20 years.
Sarah Coles: The UK market is also an income king, paying the highest yields amongst its peers, including the US, Germany, and France.
An estimated £94.5bn will be paid out in dividends this year by UK-listed companies. We need to remember though that past performance isn’t a guide to the future and no income is guaranteed.
Susannah Streeter: While it’s super-important to remain diversified across other geographies – and not put all your eggs in one basket – investing in the UK stock market could present significant opportunities.
Sarah Coles: Government gears have been cranking up to persuade more companies to list in the UK. Chancellor, Jeremy Hunt, hosted a charm offensive with entrepreneurs and tech company bosses at his Dorneywood residence in Buckinghamshire. It comes as a bosses at the London Stock Exchange have said there shouldn’t be panic about the number firms leaving London – or opting to list abroad – and there will be relief that computer firm, ‘Raspberry Pi,’ has stated its intention to list in the capital, which will be seen as a coup, particularly given the reputation the UK’s trying to foster as a breeding ground for tech startups.
Susannah Streeter: Now, a big part of the jigsaw – when it comes to investing in the UK stock market – is the part which pension funds play. It seems UK pension funds are very much behind the international curve when it comes to investing in their home market.
Let’s bring in Helen Morrissey to find out why. Helen – just how far behind the curve is the UK?
Helen Morrissey: Right now, quite a long way. Demand for equities – including UK equities – has dropped massively since the turn of the century. Analysis from thinktank, New Financial, shows that, over the past 25 years or so, UK pension funds have reduced their overall allocation to equities from 73% to just 27% –and they’ve slashed their allocation to UK equities from 53% to just 6%. This means that, since 2000, the share of the UK stock market owned by UK pensions and insurance companies has fallen from 39% to 4%.
Sarah Coles: That’s an enormous drop – what are the reasons behind it?
Helen Morrissey: A key one was the introduction of what was known as the FRS 17 accounting rules. These rules require companies to calculate whether their defined benefit pension schemes were in surplus or in deficit.
Just to explain – when I talk about ‘Defined benefit schemes,’ I’m talking about pensions that pay you retirement income based on how long you’ve worked at the company and what your final salary was. These are different to defined contribution schemes where the amount of income of dictated by the contributions paid in, investment performance, and the choices made at retirement.
If the scheme was in deficit, then this had to be disclosed in their accounts. Now, these figures could prove volatile and this became a huge issue for these companies. This prompted the shift towards closing these defined benefit schemes and trustees started to shift from equities into bonds. This strategy was seen to be delivering a lower level of risk, but when bond prices fell – as they did in the aftermath of the mini-budget – it delivered a whole new set of headaches.
Susannah Streeter: We remember that situation very well! What are the other challenges UK schemes face in this area?
Helen Morrissey: There’s also been a major debate around whether UK schemes should be investing more in areas such as UK infrastructure, with comparisons being drawn between the UK and markets such as Canada, where schemes are big investors in such areas. However, they are very different markets. For a start, the UK market is much more fragmented with many more smaller schemes. These smaller schemes just don’t have the scale to invest in these areas in the way the Canadian or Australian superfunds do.
Added to this is the issue of cost, which can make it difficult for UK pension schemes to invest in higher growth areas. One example is the default charge cap levied on defined contribution schemes. This was introduced to make sure savers were getting value and not paying fees that were too high – however, others argue that it’s set at a level that makes investing in some of these potentially higher growth areas much more difficult.
Sarah Coles: But the Government has really ambitious plans for pension schemes to invest in UK-based high growth companies, doesn’t it?
Helen Morrissey: It does. Last year, the Chancellor unveiled the Mansion House Reforms. These aim to encourage defined contribution and local government schemes to invest more in UK businesses. As part of this, there’s an agreement between nine of the UK’s largest defined contribution pension providers, committing them to the objective of allocating 5% of assets in their default funds to unlisted equities by 2030. For context, the default fund is the fund workplace pension members are placed in if they don’t make an active investment decision themselves – and these can cover a huge proportion of members.
They’re also looking at ways of encouraging local government schemes to up their allocation to asset classes such as private equity. Government believes that these reforms will deliver higher retirement incomes for retirees.
Susannah Streeter: But how would that be measured?
Helen Morrissey: Under government plans, schemes will need to disclose how much they are invested in the UK versus overseas – and compare their performance against competitors. This is aimed at helping savers understand what they are paying – what they’re getting for that money – and help them to make more informed choices. Schemes deemed to be performing poorly will not be allowed to take on new business – and we could see them forced to be consolidated within a larger scheme.
Sarah Coles: It sounds like there’s some huge changes to come for UK pensions there – thanks for taking us through them.
So, that’s what pension funds have their eye on, but what should pique the interest of retail investors when it comes to the UK stock market? Our Lead Equity Analyst – Sophie Lund-Yates – has been looking into this.
Before we start, I should say that investing in individual companies isn’t right for everyone – that’s because it’s higher risk – so your investment depends on the fate of that company. If that company fails, you risk losing your whole investment. If you can’t afford to lose your investment, investing in a single company might not be right for you.
You should make sure you understand the companies you’re investing in – and their specific risks – and you should make sure that any shares you own are part of a diversified portfolio.
So, Sophie – which UK-listed companies have caught the team’s eye?
Sophie Lund-Yates: Hello! So, this is an interesting time to be looking at the UK – as you’ve been discussing – and the team has been coming up with some share-picks. I can only go through three of them today, but we have an article outlining the rest – and more.
So, the first one I’ll talk about is London Stock Exchange Group (LSEG). Now, as you might expect, this is the owner of one of the world’s oldest and largest stock exchanges, but there are lots of other strings to its bow these days. That includes the more traditional side of things – like issuing equity and debt – but the acquisition of Refinitiv means data and analytics are its new bread and butter, as well as a clearing business which is riding the wave of regulatory changes to derivative markets.
We’re particularly interested in the data and analytics side of things – we see the potential for growth in a big way, aided by things like developments in AI. Growth in subscriptions means over 70% of revenues are now recurring – and this is a more attractive source of revenue.
Digging down into the numbers a bit more – and LSEG’s free cashflow is strong, which is a really important indicator of a company’s ability to invest for growth.
One thing to take away – on a more cautious note – is that a sharp decline in global economies and markets could hamper sentiment towards this stock in particular.
Susannah Streeter: That’s certainly something that we would be keeping an eye on.
So, Sophie – who else do you have in your sights?
Sophie Lund-Yates: That would be a giant of the FTSE – BP. As many listeners are probably aware,
BP produces, refines, and transports oil and gas, but it also has a significant customer distribution network for motorists and the aviation industry.
Regardless of where people sit on the energy debate, it’s true that fossil fuels are still an essential part of the energy mix and are likely to remain the bedrock of BP’s business for the foreseeable future. But – looking to the future – we are supportive of BP’s transition plans.
BP has one eye firmly on renewables and low-carbon energy. It already generates enough renewable energy to power around 2 million homes and a pipeline of projects that could see this capacity increase more than 20 times over.
Something to keep in mind is that maintaining the traditional business – and bringing new energy sources online – requires bucketloads of investment! The groups does generate significant cashflows, which also helps underpin the not-ungenerous yield – which we view as well supported. Please remember that no dividend is ever guaranteed.
Ultimately, the team views BP as a better-placed name in the oil and gas market, in part because of its renewable efforts, but also of the view that the valuation looks compelling – although, of course, all share prices can go down as well as up, so investors could lose money.
Sarah Coles: That’s an important reminder – thank you, Sophie. What’s the final name?
Sophie Lund-Yates: That would be a personal favourite – from a consumer perspective – in the form of Greggs!
Greggs has become a staple in town centres and retail parks across the country. Recent performance has been impressive, with last year’s sales breezing past market expectations. It’s starting to build up a reputation for delivering on results day – which can actually become a bit of a curse, but that’s me just being a bit picky.
A revamped and improved menu, refreshed stores, and growing delivery options all mean it’s able to hoover up demand. Its more accessible price points mean we think it’s well-placed to serve people who want to treat themselves – even while watching discretionary spending.
In particular, we’re really impressed with the efforts to crack the evening food market – food-to-go, specifically. The potential for growth here is substantial – and, because Greggs is starting from a lower base, the proposition is a tempting one.
Growth is a bit slower – because prices aren’t rising as inflation is easing – so this isn’t something the team and I are especially worried about. The main risk – where this bakery-favourite is concerned – is the fact that it’s set a really high bar. As I mentioned earlier, this can equate to the market being more easily disappointed.
Sarah Coles: Thanks, Sophie – there’s some interesting companies to watch there – and clearly some opportunities in the UK – but remember this is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Susannah Streeter: Let’s bring in Emma Wall now, who’s been looking specifically at UK funds and investment trusts.
Before we get into them, it is worth noting here that investing in these funds – or investment trusts – isn’t right for everybody. Investors should only invest if the fund or trust objectives are aligned with their own and there is a specific need for the type of investment being made. Investors really need to understand the specific risks of a fund or trust before they invest, and make sure that any new investment forms part of a diversified portfolio.
So, taking all of that in mind, Emma – what is your first pick?
Emma Wall: It is a fund that may be familiar with our listeners – as we’ve talked about it before in the podcast – but that’s because we think the team are one of the very best in the business. It is Artemis Income. The three managers are Nick Shenton, Adrian Frost, and Andy Marsh. They mainly invest in large UK businesses, but will invest in some medium-sized companies when they find great opportunities. The fund invests in companies that they – the managers – think can pay a sustainable income through the market cycle, whatever the economic backdrop. These tend to be businesses with lots of reoccurring revenues. This increases the chance that they can retain and grow their customer base – and their profits [laughs] – and, therefore, their dividends over time – although, of course, nothing is guaranteed.
Artemis Income also takes charges from capital, which can increase the yield, but reduce the potential for capital growth. Income funds are a great consideration for most portfolios – so, even if you don’t need the dividends now, you can reinvest that income and harness the power of compounding.
Sarah Coles: So, that’s Artemis Income – what about the second fund-pick?
Emma Wall: The second one we’ve gone for is Royal London UK Smaller Companies. The Lead Manager – Henry Lawson – has spent his entire investing career focused on analysing UK small and medium-sized businesses. He and Deputy Manager – Henry Burrell – aim to deliver long-term growth by investing in some of the smallest companies in the UK stock market which they think have plenty of growth potential. Smaller companies, typically, have more room for growth than larger ones, though they can be more volatile and are higher risk.
Managers invest in financially-resilient, quality-growth companies, trading at what they think are attractive valuations with the ability to survive or thrive when times get tough. With less research focused on this part of the market – compared to larger companies – the managers aim to use their experience to uncover hidden gems.
Susannah Streeter: What’s pick number three?
Emma Wall: I have gone for an investment trust for this one – and it is Fidelity Special Values. Manager, Alex Wright, employs a contrarian investment approach and invests in unloved, large, medium-sized, and higher-risk smaller companies. Alex Wright has more than 20 years investment experience and is supported by a large, well-resourced team of investment professionals at Fidelity.
Wright invests in companies that often go ignored by other investors – perhaps they’ve missed their profit target, or the management team have made some unpopular decisions. Either way, he must believe that the company is on the road to recovery. As it improves, its share price should rise as other investors recognise this change. As the price rises, Wright gradually takes profits and moves onto the next unloved opportunity.
The manager’s focus on unloved companies differentiates it from other UK-focused investment trusts. While investment styles go in and out of favour, we like that Wright has never deviated from his longstanding investment approach. The manager has the flexibility to invest in derivatives as well, which – if used – can add risk. Wright can also borrow to invest – which is known as gearing – which can add risk if used.
It’s also worth knowing that an investment trust is traded on the stock market like a share – unlike a fund – so its price doesn’t just depend on the value of the things it holds – which is known as the net asset value – but it also depends on demand for its shares. It means, if it’s in high demand, the share price could be higher than the net asset value – known as a premium – and, if demand has dropped, it can sell at less than the net asset value – which is known as trading at a discount.
Susannah Streeter: Thank you, Emma – it is certainly an interesting time for the UK market, all round.
Further commentary on these funds and investment trusts – and the rest of the selections – can be found on our website, along with charges and risks and Key Investor information.
Now, this podcast is focusing on British companies, but clearly that’s not the only part of the picture for markets – because the behaviour of British investors is also key.
So, we wanted to bring in Nathan Long – a Senior Analyst from Hargreaves Lansdown – to talk about the latest special edition of the HL Savings & Resilience Barometer, which explores a bit about how we’re investing and – perhaps more pertinently – how we’re choosing not to.
So, Nathan – can you explain a bit about the report?
Nathan Long: Sure. As regular listeners may recall, we produce this barometer work every six months, which highlights the strengths and weaknesses in a household’s finances. A big part of our financial lives always seems to be about having to do more. So, we might think that we’d be more resilient if we could save more – or if we could invest more – or if we could put more into our pensions.
In the past few years, it’s been even harder than usual to dig out those extra few pounds from our monthly budget – it can feel like we’re on a bit of a hiding to nothing. So, we wanted to explore how much people could achieve by moving around money that they already have – to use the excess they’ve got in some areas to build financial resilience in others. It’s something that we’re calling ‘The efficient use of money.’
Sarah Coles: So, what did you find? Where is this extra money lurking?
Nathan Long: It’s actually in the savings people have put aside for a rainy day. The Barometer has found that these savings have risen substantially since 2019. That owes a lot to the lockdown savings that we made – and the fact that savings rates reached a high of around 17% in 2020 – so that’s the percentage of people’s incomes that goes into savings after they’ve covered the basics.
Less than 30% of these gains have been unwound during the cost-of-living crisis. Whilst it’s not actually been an even unwind – so the higher-income households have fared better than lower-income households – we’re all still sitting on quite a pile of additional savings to use more efficiently. That doesn’t just mean more people of working age will have the recommended cash savings to cover the 3-6-month-worth of essential spending – it also means some people will be sitting on more cash than this – and that’s where they can start to put it to better use.
Susannah Streeter: Where could people move it to make the most of it?!
Nathan Long: 6.4 million households have no arears – that means they’re not behind with debt payments or utility bills – and they’ve got more than enough savings, but they’re not investing.
They could consider moving those extra savings that they don’t need in the next 5 years into a Stocks and Shares ISA. This would boost their overall financial resilience dramatically because it makes their money work harder for them over the longer-term.
Typically, the more a household has in income, the more savings they’re likely to have, so the bigger boost they can get from making that move. It’s the highest-earning households that tend to be able to benefit most from this move.
It’s vital not to overlook protecting your loved ones too. There’s 14 million households with a dependent in Britain – and over half of them don’t have enough life cover to protect their families if something was to happen to them.
The good news is that 2.4 million of those households have a solution at their fingertips because they can afford to close that gap simply by using the spare cash that they have at the end of the month – without leaving themselves short. This is actually an area where people are often in the dark – so, if you’re employed, check how much your family might receive if you die. You might find that you’re already quite well covered, and you might be able to increase this amount if your employer offers any flexibility.
Sarah Coles: Can you tell us what this found about pensions?
Nathan Long: The Barometer shows us that there’s 12.2 million households that aren’t on track for a moderate living standard in retirement. Within this group, almost 7 million are not in arears – so 7 million are not behind with debt payments – they’re not behind with utility bills – and they have some excess cash or investments that could be used to boost their pensions – or their SIPPS.
That’s a relatively simple behavioural shift that could see an extra 1.8 million households hitting that moderate living standard in retirement. The key thing here is that it’s the opportunity to benefit from the government incentive to boost your retirement savings. Basically, it’s using existing monies, but just more efficiently.
Susannah Streeter: Of course. This isn’t the solution to everybody’s financial issues, is it?
Nathan Long: Unfortunately not – and there are some households that really are struggling.
Over the past four years, we’ve seen the number of households in arears grow to as high as 1.8 million. They’re less likely to have assets elsewhere that they can use to manage their debts. They also have less cash spare. The average cash left over at the end of each month – for people in this group – is £30, making it difficult for them to deal with their debts.
Similarly, there are 7.3 million households who don’t have enough savings. Of these, 5.8 million that aren’t in arears, so there’s scope for them to save more. However, this is made more difficult by the fact that they have less cash at the end of the month. It would take the average household amongst the lowest-income households nearly four years to build up enough savings through the money that they’ve got left over at the end of the month. It’s quite a challenge for some of those households – but we shouldn’t be put off by that.
Improving your finances isn’t all about being perfect overnight – it’s about doing what we can. When tougher times come, you’ll be grateful for every penny you’ve managed to save.
Susannah Streeter: Thank you, Nathan – it’s good to get a Barometer update. It does give us a great snapshot of where so many people are, financially.
It is nice to hear that, for some people, at least, the answer to their financial problems may actually already be in their own accounts!
You’re listening to Switch Your Money On from Hargreaves Lansdown. Before we go, there is time for a quick stat of the week. This time, we thought we’d delve into some research we’ve been doing on people’s attitudes to investing close to home.
We started by asking people if they were more likely to invest in something touted as being specifically for the UK – or to benefit it. We found that almost a third of people would be more likely to – and slightly less than one in 10 would be less likely to.
We then asked people in each of the home nations the same question, but about their own home nation. So, who do you think would be the most likely to be persuaded to invest for their own home nation? Was it England, Northern Ireland, Scotland, or Wales?
Sarah Coles: Well, having grown up in Scotland – and spent a lot of my formative years there – I’d say the Scots would be super-keen to support Scottish investments – so I’m gonna go with that.
Susannah Streeter: You are right – but only just. 54% of Scots said they would want to invest for Scotland, 52% for Northern Ireland – 51% of Welsh people for Wales. All of them were way ahead of England at just 38%.
Sarah Coles: It looks like there’s even more interest in benefitting your home nation than the UK as a whole, which is a really interesting trend.
Susannah Streeter: Yeah – maybe one for politicians to wrestle with in the coming months! Let’s not get too dragged into politics – it does feel like an entirely different podcast – and we are out of time.
Before we go, we do need to remind you that this was recorded on 23rd May 2024 and all information was correct at the time of recording.
Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest, and past performance is not a guide to the future.
Susannah Streeter: Yes – this is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research – and is considered a marketing communication.
Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah Coles: You can see our full non-independent research disclosure on our website for more information.
All that’s left is for me to thank our guests: Nathan, Helen, Sophie, Emma – and our Producer, Elizabeth Hotson.
Susannah Streeter: Thank you very much for listening. We’ll be back again soon – goodbye!