As the new tax year commences, we look at why you should make the most of your ISA allowance within an IG stocks and shares ISA and dig into the most popular shares in IG clients’ stocks and shares ISAs.
Utilising your ISA allowance
The new tax year is almost upon us and with this your yearly Individual Savings Account (ISA) allowance will refresh on 6 April. For those unfamiliar with ISAs, each year you can deposit up to £20,000 and it is important to maximise your yearly allowance as ISAs enable you to grow your savings free of tax.
Over the last few years the government has added to the range of ISA products available for individuals to use, such as Lifetime and Innovative Finance ISAs, however Stocks and Shares ISAs and Cash ISAs are by far the most popular and are still the core options. As seen in figure 1, history shows us that the majority of funds have been allocated to Cash ISAs with just over 65% of all funds deposited into ISAs over the 2019/20 tax year going into a Cash ISA account.
Whilst Cash ISAs might be suitable for people with short-time horizons or perhaps to build up an emergency fund it is likely that, generally speaking, stocks and shares ISAs would be more suitable for those who have longer-term view. The key reason for this is that the current interest rates for easy-access cash ISAs are all under 1% and these rates are well below current inflation levels. The latest inflation reading in the UK was 5.4%, so effectively you are losing money on a real return basis if you put money into a cash ISA.
Historically, people have been rewarded for investing in a stocks and shares ISA. Whilst this year has been tough for markets so far, over the last 20 years global stocks have averaged an annual rate of return of +7.4% and that’s whilst navigating plenty of major risk events, such as Brexit and, more recently, an unprecedented global Covid-19 pandemic. Not only this, research conducted by First Trust found that over the last 33 events when U.S. stocks fell by over -10% the average decline was -18.5% but this was followed by a +24.9% rise over the next 12 months. This highlights that long-term investors have been compensated for taking on risk and have significantly outperformed cash savings accounts in doing so, although it is important to note that past performance is no indication of future returns.
Figure 1: Number of ISA accounts subscribed to and total amount subscribed during financial years
What were the most popular equities over this ISA season?
So, what have IG clients historically invested in on their stocks and shares ISA accounts? Below you can see the top 20 equities by number of trades over the previous ISA season, which we categorise as the three-month period from March to May 2021.
Figure 2: Most popular stocks in IG ISA accounts by trade count (20/21 ISA season)
Tesla (TSLA) continued to be one of the most popular stocks amongst IG investors and ranked second in terms of numbers of trades over ISA season last year. Although, the electric vehicle (EV) company experienced a significant drop in its share price in the first quarter (Q1) of 2021, down -5.4% underperforming the wider Nasdaq index by -7.1%. Adding to this, in April 2021 news broke that two men were killed in the US following a fatal car crash while reportedly using the Tesla Autopilot system which sent the price Tesla shares down even further. Outside of Tesla, Lucid Group (LCID) also ranked within the top 20 stocks over the 2021 ISA season.
The hype around EV companies increased even further after ISA season and in Q4 2021 we saw a huge spike in client interest in growth sectors, like technology and consumer discretionary stocks. A lot of this was driven by EV stocks as we saw quarter-over-quarter in Tesla and Lucid jump in Q4 2021 by 120.3% and 141.1% respectively. Furthermore, Rivian Automotive (RIVN), which IPO’d in November 2021, was one of the most popular stocks over Q4 2021 despite only being available to invest in halfway through the quarter. In fact, Rivian was the largest IPO last year and was the largest from a US firm since Facebook and that’s all whilst Rivian was a zero-revenue company.
Whilst interest peaked in meme stocks within the first couple months of 2021, heightened trading activity on these stocks continued into ISA season last year. The two most well-known meme stocks, GameStop (GME) and AMC Entertainment (AMC), both ranked within the top 10 most popular equities over ISA season as large spikes in the price volatility continued to intrigue investors.
For context, the reason behind the rise of meme stocks came as a result of retail traders coming together to drive the price up of a company’s stock using various social media platform to spread the message. Adding to this, heavily shorted stocks were targeted to cause a short squeeze which pushes the price up even further. Clearly, this was a new market phenomenon that investors had never experienced before, one which ignored any real fundamental or technical analysis, and therefore it can be argued that a lot of the trading in these stocks was due to a fear-of-missing-out mentality.
Global aviation was undoubtably one of the hardest hit by the Covid-19 pandemic as governments around the world restricted international travel in an attempt to curb the spread of the virus. After a tough year in 2020, International Consolidated Airlines Group (IAG), the parent company of British Airways, rebounded in Q1 2021 after the UK’s vaccine rollout gained momentum and Covid-19 cases were on the decline. Over Q1 2021, IAG saw its share price jump +24.1%, compared to a +3.9% increase in the FTSE 100, and as a result of the improved investor confidence was the most popular stock over ISA season.
Cryptocurrency and blockchain linked stocks were also extremely popular to invest in on ISA accounts last year. The stand-out stock in this space was Coinbase Global (COIN) which accounted for 0.7% of all trades over ISA season and was the seventh most popular stock over the period. Interestingly, Coinbase only listed on 14 April so essentially it had half the trading days over ISA season compared to other equities.
Coinbase IPO’d at a time when we saw an astronomic rise in crypto-assets in the first quarter of 2021. At that time, the firm had around 56 million users and held approximately 11.3% of the cryptocurrency market capitalisation on its platform. Coinbase also saw its revenue jump to $1.8 billion in Q1 2021 whereas it generated $1.3 billion in the whole of 2020.
Moreover, it has been suggested by some analysts, such as Larry Cermak (director at The Block) that Coinbase’s share price will have a strong correlation with bitcoin, thus could perhaps be used a proxy to invest in bitcoin within an ISA wrapper. Yet, Brian Armstrong (Co-founder of Coinbase) argued that investing in Coinbase is more like a broader trade on crypto assets as it has over 100 cryptocurrencies available on its exchange.
How are investing habits changing?
Having said this, we have started to see a shift in investing habits amongst IG clients this year due to the current risk-off sentiment as a result of interest rate hikes, rising inflation levels and the ongoing conflict in Ukraine.
In response this, one of the key changes we have started to see is a significant increase in popularity of UK stocks at the expense of US equities. As of February, UK equities accounted for the majority of new trades amongst IG investors and, as seen in figure 3, the trade split versus US stocks has been steadily increasing in favour of UK shares. The trade split last month was 57.3% for UK stocks whereas in the whole of 2021 it was essentially the opposite with US equities capturing 57.2% of trades.
Figure 3: UK vs. US equity trade split
The growing popularity of UK stocks has occurred due to its recent outperformance in comparison to US shares. Since the start of this year the FTSE 100 has returned +8.4% more than the S&P 500, as of the end of February. This overperformance is mostly down to the FTSE 100’s larger exposure to value stocks, which have historically performed better in the current environment of rising interest rates. For example, financials and consumer staples, which are typical value sectors, are the largest two sectors in the FTSE 100 and make up approximately 37% of the index. In contrast, riskier growth sectors like technology and health care account for around 42% of the S&P 500.
Also, in recent months we have started to see a shift towards value stocks more broadly as IG investors have started to tilt away from riskier assets. Figure 4 outlines the change in trade concentration by sector between the full year of 2021 against Jan to Feb 2022, this means a positive number indicates that the percentage of trades on a sector has increased in 2022 thus far. With this in mind, we can see that IG clients have, proportionally, invested less in health care and consumer discretionary stocks over the first two months of 2022. As figure 4 highlights, this has been in favour of investing in traditional value sectors such as materials and financials which have seen growth of 2.5% and 2.4% respectively.
Having said this, technology stocks, widely recognised as a growth sector, is an outlier here and did in fact see the largest positive change in terms of trade concentration over this period at +4.3%. However, this can be explained as several large technology firms reported earnings in the first two months of 2022. As expected, this resulted in heightened interest and is why trades on technology stocks were inflated compared to the full year of 2021. For context, these were some of the most popular technology firms amongst our ISA clients who reported in January and February this year: Nvidia, Palantir, Microsoft, PayPal, Apple, Advanced Micro Devices.