25 May 2023
When it comes to wealth management and investment, the UK has historically made up a critical element of the worldwide investment market. For example, in the 1980s and 1990s, the UK accounted for 10% of global indices, which meant that not only the domestic but also worldwide pension funds and insurance companies were forced to invest in the UK. However, the situation has changed in recent years from an asset allocation/wealth management angle.
While there are hopes that the UK can make up lost ground once the Brexit consequences are clearer, estimates suggest the UK has fallen $250 billion behind the French stock market. Moreover, according to the globally recognised MSCI All Countries World Index, the UK now accounts for just 3.8% of global markets. This has had a significant impact on the way that wealth management companies view the UK and their degree of exposure.
Looking back, the UK was a leader in privatisation, and UK companies were financing the huge oil developments in the North Sea. As recently as the 1990s, the UK was also part of the global technology boom, battling with the US to attract the attention of tech companies as well as wealth management, insurance and pension companies worldwide. In addition, improvements in efficiency and the global reach of many large UK companies made them attractive to international investors.
Many wealth management companies will point to the election of Tony Blair in 1997 as a turning point for the UK stock market. This led to:-
· Arbitrary taxes on UK privatised companies
· Privatised companies being snapped up by overseas competitors
· Issues with British Rail and other utility companies
· Abolishment of tax credits on dividends
The abolishment of dividend tax credits led to an immediate £5 billion annual windfall from pension funds. The Office for Budget Responsibility estimated that by 2014 this tax was up to £10 billion a year, with a cumulative take of £118 billion from UK pension funds. If you add market-led investment growth, the cumulative impact was nearer £230 billion. That was in 2014; the effect will be a multiple of that figure today!
As a considerable element of potential growth had been removed from pension funds, we saw many of the defined benefit schemes (final salary schemes) closed to new members. As a result, wealth management became much more challenging for pension funds, with many taking a less risky approach, increasing their government bond exposure.
The wealth management sector was subjected to even tighter regulations in the aftermath of the 2007/8 US subprime mortgage crash. More recently, we have also seen UK investors looking towards overseas exposure, with some experts suggesting the UK market trades on a discount of 18% compared to overseas competitors.
As we have covered in recent articles, the UK government has taken a much more proactive approach to attracting new investment into the UK financial sector, particularly the stock market. In response to a more open policy from wealth management companies, the UK government is also looking at ways to regulate cryptocurrencies and digital assets. These have proven particularly popular in the Far East, with Hong Kong and Singapore looking to become global hubs.
It is easy to forget how the UK stock market has recently underperformed many of its competitors. Looking back to the 1980 and the 1990s, the pinnacle of the UK stock market, gives a perfect comparison. However, a more proactive approach in recent times is starting to help, and there are high hopes that the UK can regain some of the lost ground.
Even a relatively modest reduction in the estimated 18% valuation discount would make a huge difference. If the government can get the wealth management companies back onside this could have a significant impact on the UK’s global investment standing. There are reasons to be optimistic!Back to News