British stocks hold their shine in spite of gloom

UNEMPLOYMENT is high, the economy is barely out of recession and the UK’s fiscal deficit is cause for concern. Compared to emerging markets where growth is storming ahead, it seems like a no-brainer as to where to invest. Barclays Stockbrokers’ clients agree – half think emerging markets will deliver the greatest returns in 2010 while only a quarter say the UK is best-placed.

But while the UK might seem like a bit of an economic basket case right now, investors shouldn’t be put off buying British. Firstly, many of the big London-listed companies are multinationals so their fortunes are less tied to those of the UK economy. Ensuring you invest in stocks with international exposure is important, says Mark Powell, UK portfolio fund manager at JM Finn & Co, a private client investment manager. But Powell stresses that you also need holdings with international earnings. It is estimated that UK blue-chip companies earn up to 60 per cent of their turnover in either dollars or euros.

He holds few stocks that do not have overseas earnings exposure and is very underweight of retail. “Unemployment is high, and although we are in a cyclical upturn and indicators suggest the economy is recovering, there are going to be a lot of cuts made by central and local government. I think anything directly connected to the consumer is going to struggle.”

Utilities and oil and gas majors are proving popular at the moment and Powell has a 24 per cent weighting in oil and gas and 12 per cent for utilities – compared to the sectors’ 17 per cent and 6 per cent weighting in the FTSE 100.

The FTSE 100 is also reasonably valued on a short-term basis, says independent analyst David Stevenson. He points out that the cyclically adjusted price to earnings ratio, which smoothes out profits over the longer-term, is indicating that the FTSE is back at roughly fair value.

There are many ways to gain access to the FTSE 100 from investment managers such as JM Finn to listed products such as exchange-traded funds (ETFs) that track the index and accelerators – RBS has recently listed its UK Accelerated Tracker 3, which gives investors the potential to double their exposure to the capped growth of the FTSE.

But investing in UK stocks is not all about the blue chips. Many London-listed small caps are worth a look too. Investors are always being warned off small-caps because of the illiquidity, but Giles Hargreave, chief executive of Hargreave Hale, says individuals are at a great advantage because they can be much more agile, providing they work hard at researching the firms. Both RBS and Societe Generale offer covered warrants on the FTSE 250 while FTSE 250 ETFs are readily available.

Make the most of Britain’s best stocks.

RBS is hosting a free seminar tonight at 5.30pm at its HQ on Bishopsgate. David Stevenson will expand on his views on investment opportunities in UK-based companies and indices. RBS’s Ben Board will be speaking on some of the ways you can access the best of British. To register, email or call 0800 121 6286.