HAMISH MCRAE: UK is poised to prove its worth

It is just over a year since share prices hit rock bottom – and what an astounding year it has been. If you managed to keep your head last March when the FTSE100 index dipped below 5200, its close on Friday at around 6740 looks like a great recovery. 

But if you think back to the start of last year when it was above 7600, things do not look so wonderful at all. US shares, by contrast, have recovered much more strongly, with both the Dow Jones and the broader S&P500 indices hitting all-time highs earlier this month. 

So where now? What should people do with their savings when banks offer such derisory returns? 

Choices: The enterprises that make up the FTSE100 make some three-quarters of their earnings outside the UK

Choices: The enterprises that make up the FTSE100 make some three-quarters of their earnings outside the UK

There is going to be a global recovery of course, with even the laggards getting their jabs out, but maybe too much of the good news is already priced into the markets. And what happens if inflation surges, as many of us fear? 

Quite aside from the universal rules of investment that people should spread their risks and rely on the magic of compound interest to build up savings, here are three thoughts. The first is there will be a global boom in the next few months, led by America, but that is already priced into US shares. There is though a backdoor way of investing in the boom: large UK companies. The enterprises that make up the FTSE100 make some three-quarters of their earnings outside the UK, either from exports or from overseas subsidiaries. 

But because the UK is still unfashionable among investors, there is still good value there – or at least much better value than in comparable US companies. 

Secondly, if the UK does perform strongly this year, thanks in part to the fast roll-out of vaccines, not only will UK-based companies recover swiftly, but some of the lingering hostility towards Britain in general will evaporate. That will give a double boost to the mid-sized firms on the FTSE250 index. 

The third concerns inflation. It is a universal worry, and the top investment advisers have been coming out with various ideas. 

Start with what not to do. Gold has been a traditional hedge against inflation for centuries, but BlackRock, the world’s largest asset manager, says don’t buy it. Russ Koesterich, who manages its Global Allocation Fund, says: ‘I would own less gold, and for those investors still looking for a hedge, one word – cash.’ 

Vanguard Group, the world’s second largest manager, has various inflation-protected funds, as well as a global property one. 

On a long view, property has certainly been one of the great inflation hedges. Of the other US investment titans, Goldman Sachs thinks that commodities and oil will be the best inflation hedges, and given what has happened in the Suez Canal, that surely makes sense. And J.P. Morgan likes global infrastructure, something we are always going to need. 

And Bitcoin? Well, it is certainly being touted as an inflation hedge, but I would march with David Kelly, chief global strategist at J.P. Morgan Asset Management. 

Asked by Alpha Trader last week he said: ‘It’s nonsense, guys. It is the Emperor’s New Clothes, Bitcoin is nonsense. Now, at some stage, it’s sold on a crash, and people are going to say, ‘Why didn’t anybody tell us?’ He is right, but there is a huge problem here. We are in this strange world where an asset that has nothing behind it and which uses as much electricity as Belgium and New Zealand together has captured the imagination of so many investors. 

But what happens when the bubble pops? My instinct is that we have several more months of froth then – who knows when – a nasty reckoning. And that will be the time when investments in solid companies, in property and commodities, will show their worth.


Every day that passes, something else crops up that reminds us of the fragility of global supply chains. There is the worldwide shortage of computer chips. There is the disruption to vaccine exports from Europe, the scars from which will last for a generation. There is the blockage in the Suez Canal. 

The result will be that companies build much more robust supply chains. They will to some extent buy more from local firms. But you can’t always do that, so they will hold greater stocks and buy from a wider range of suppliers. 

We will pay more for our goods, but not that much more, for the benefits from offshoring production have declined as wages in the emerging world have risen. 

This is not a disaster. But rather like the broader impact of the pandemic, this disruption is a wake-up call.  

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