UK equities have been largely unloved in this year’s global equity bull rally, with the FTSE 100 up just over 12%. Global equities, meanwhile, have recorded a staggering rally, climbing more than 20% year to date.
However, as confidence has increased that we will avoid a no-deal Brexit, investors have started to re-examine UK equities. Indeed, in the last two months, UK equity ETFs have seen more than $4.2 billion of net inflows, across both large and mid-cap products.
Yield-hungry investors have also been tempted by a relatively attractive dividend yield of 4.66%, which stacks up favourably against just 2.51% for the MSCI World.
In addition to greater certainty on Brexit, a more dovish Bank of England (BoE) could also help to support UK equities. Although the BoE is officially on hold on further rate movements until after Brexit, on Thursday two Governors unexpectedly voted for a cut at the Monetary Policy Committee, suggesting the current path may not be set in stone.
Selecting your UK Equity Index — the FTSE All-Share
Although the FTSE 100 is widely recognised as the bellwether for UK Equities, it is important to remember that it is purely a large-cap index.The FTSE All-Share Index, on the other hand, seeks to cover 98-99% of the market cap of UK equities, with roughly 80% of the index in FTSE 100 companies, 16.5% in FTSE 250 mid caps and 3.5% in FTSE small caps.
This greater diversification across a larger size segment has led to better risk-adjusted returns over all trailing time periods versus the FTSE 100. The higher weight to smaller companies also gives the index a greater tilt to domestically focused companies, providing a buffer to trade tensions and rhetoric.
Be More Defensive with a Quality Income Tilt
Investors looking for a more defensive approach to UK Equities could consider the S&P UK High Yield Dividend Aristocrats Index. This index seeks to gain exposure to companies with a strong track record of sustained dividends.
Year to date, this index has relatively outperformed the broader UK market by more than 6%, which has largely been driven by