
Following July’s general election, the UK now offers a new diversification benefit, according to James Klempster, deputy head of the Liontrust multi-asset team. It has become “a relative haven of stability after nearly a decade of political uncertainty”.
“This reinforces our confidence in the UK stock market, which has been driven by valuations and the potential for capital flows,” he noted.
The UK’s role as a ballast within portfolios is partly due to its sector composition. The domestic market has more of a defensive, value tilt with higher weights to financial services, energy and healthcare, in stark contrast to the technology-heavy US market.
Furthermore, the power of dividend compounding in the UK equity market helps underpin returns, Cobbe pointed out. “Dividends are a major driver of total returns in the UK equity market given the slower earnings growth and lower multiples in the UK compared to the US, so for a defensive posture, a dividend-focused strategy such as VT Munro Smart-Beta UK fund should prove an even more effective diversifier in challenging markets,” he said.
Equity income funds offer even greater diversification benefits to the broader stock market. The IA UK Equity Income sector has the lowest one-year correlation to the MSCI World amongst all of the Investment Association’s UK equity fund sectors, as the table below illustrates.
Correlations between UK equity sectors and the MSCI World Index over 1yr

Source: FE Analytics, data to 29 Aug 2024 in sterling terms
Dividend income from equities is set to become a more attractive source of income as the Bank of England cuts rates and yields on savings accounts and gilts falls commensurately. Computershare expects UK large-caps to yield 4% based on its forecasts for regular dividends in the year ending 30 June 2025, as the chart below illustrates.

Source: Computershare UK Dividend Monitor, Q2 2024 edition
While Cobbe argues that diversification is the main reason for an investment in UK stocks, Klempster is confident of the market’s potential to outperform. “We believe the UK could turn versus the other majors. It is hard to predict when, but to our mind it will not require a major catalyst. UK stocks have already had a relatively strong start to 2024 and its economy has surprised on the upside as the UK emerges from the shallow recession that started at the back end of 2023,” he explained.
Meanwhile, Ben Conway, chief investment officer of Hawksmoor Investment Management, thinks the most exciting aspect of the UK stock market is the level of valuation dispersion. “We find that the lower down the market-cap spectrum one goes, the cheaper stocks become,” he said.
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