As a comparison, global equity exposure as a percentage of equities owned was at 22% in 1987. This clearly shows that investors have been increasing their exposure to global equities over the last few decades.
“I think it’s a healthy trend,” said Richard Maitland, co-author of the Sarasin & Partners ‘investment compendium’. “By investing overseas, investors are potentially protecting themselves by diversifying more widely he added. But people do need to consider the associated currency risks.”
“If sterling gets too strong, it could hurt you. So if you invest substantial amounts overseas you should consider whether some or all of the currency risk should be hedged back into sterling” he added.
The main drivers behind this increased international exposure are the desire to diversify away from the concentrated UK equity market and to keep pace with globalisation, according to Sarasin & Partners. Other reasons include potentially higher growth overseas, exposure to industries that would otherwise not be included in the UK market (which is very underweight in IT for example), as well as the risk element.
Of the dividends paid out in 2014 oil & gas represented 19% of the total weighting, according to Goldman Sachs investment research. The UK market has a disproportionately large exposure to energy stocks – the majority of this exposure being in two companies: BP and Royal Dutch Shell. “Do we really think this is a wise sector to be in?,” commented Maitland.
During a presentation on Monday in London, he also pointed out that the same figure used to be 30% in the banking sector, and that this strong energy and bank bias has a consequential impact on the diversity of the income produced by the UK market.
Meanwhile, the top 5 individual companies accounted for 35% of the total, and the top 10 individual companies accounted for 54% of the total of relative sector weights; pointing further to how relatively concentrated the UK market is in certain sectors.
Globalisation is another reason for investors approaching stock-picking on a global basis. Today UK investors that are looking for shares in a multi-national oil company would gain nothing from restricting their choice to London-quoted oil stocks, notes the compendium.
In addition, the rapid internationalisation of equity markets during the past ten years mean that more companies are choosing to list in countries far away from where they grew up, and most of the largest companies on any regional stock market generate more earnings outside the country where their primary listing is than within it.
“There are more and more investors who care more about where the companies they invest in are making their money, as opposed to where the company happens to be listed,” said Maitland.
