UK vs US stock market – who comes out on top?

The US and UK share a healthy dose of (mostly) friendly competition. But how do these two nations stack up against each other in the world of investing and finance?

This article isn't personal advice. If you’re not sure if an investment is right for you, seek advice. Investments and any income they give you can fall as well as rise in value, so you could get back less than you invest.

Growth vs not so much growth?

The UK has been unfavourably compared to the US in recent months. There are questions over whether the London Stock Exchange is properly geared up to attract and retain exciting companies. A high-profile example included Cambridge-based tech giant ARM choosing to list in New York, based on its reduced red tape and better terms.

The UK government still says it’s committed to making London a high-growth financial hub. But the broad consensus is that there’s a lot of work to be done before the problems, which were made worse by the higher complexities and costs from Brexit, are ironed out.

The pool of available investors is much bigger across the pond too, which makes raising money easier.

The US is the more exciting and competitive market. But that’s not the same as growth for investors being guaranteed. The more favourable regulatory environment and sheer size of the US exchanges make it more of a hotbed for many diverse companies. Younger, high-octane companies can mean higher rewards. But they can also burn investors.

We prefer companies with proven track records of profit and free cash flow generation, which a lot of US high-growth names don’t have.

Of course, the US has plenty of profit generating companies too. But investors should remember that taking a successful long-term approach is more about choosing the right company, than it is being swayed by which stock exchange is flavour (sorry, flavor) of the month.

Should investors root for the underdog?

The market hasn’t shown the UK much love so far this year. The FTSE All-Share has barely moved, while the broader US stock market has returned 12.3%*, eclipsed by the 27.3% that the tech-heavy Nasdaq Composite has delivered. Remember, past performance isn’t a guide to the future.

Five-year total return

Past performance isn’t a guide to the future. *Source: Refinitiv Eikon, to 31/05/2023.

Does that mean the US is a better option for investors?

Not necessarily. The US is seeing a bounce because it was particularly badly punished in 2022. Big companies and tech names came under huge pressure when interest rates increased, because investors switched to different types of investments.

That’s largely being undone now as markets expect the Federal Reserve’s interest rate hiking cycle to slow down, or even pause soon. A recovery from tougher times shouldn’t be confused with supercharged underlying growth.

At the same time, the UK market is largely geared towards beaten up sectors. Things like banks and financials as well as consumer discretionary stocks (businesses that rely on people spending on non-essentials). These types of stocks are more sensitive to economic ups and downs, which is why they’ve been subdued in the wake of recession fears and stubborn inflation. That doesn’t mean they should be automatically avoided.

Both the UK and the US are open to share price sensitivity, as well as opportunity. Movements in markets shouldn’t be taken in isolation. Trying to time the market is nigh on impossible. Investing should be with a long-term view in mind, and that means taking the troughs with the peaks.

Ultimately, we think certain UK names have the potential for some upside given lower valuations in some sectors, but remember this isn’t guaranteed.

How do you like your (shareholder returns) in the morning?

If there’s one area where the UK and US differ, it’s how they return money to shareholders. Despite an increase in share buybacks in the UK, it’s still very much seen as more of an income-region. That just means dividends are more likely than buybacks.

Dividends vs share buybacks – what investors need to know

The FTSE 350 has a forward dividend yield of around 4%. That’s compared to 2% for the broader US stock market. US companies are more focused on returning surplus capital to shareholders via buybacks. Last year, there was only one non-US name to feature in the top ten buyers of own-stock. No shareholder returns are guaranteed and yields are variable and are not a reliable indicator of future income.

But which is better?

As an investor, dividends provide flexibility in that you can choose what you do with the cash. You could:

• Reinvest to buy more shares in the company.
• Buy shares in another company.
• Use it as an income.

If a company’s just announced it’s about to start paying dividends, the message is that it’s now making enough cash to start giving back to its shareholders. While there are no guarantees, they’ll rarely start making payments without being confident they can grow the dividend over time.

But if a company has historically reinvested for growth, then decides to pay a dividend instead, investors could question whether those potentially profitable growth opportunities have dried up.

The other side of the coin is buybacks.

Generally, share buybacks can:

• Give a positive signal that the company thinks its shares are worth more than they’re trading at – but remember this won’t always be the case.
• Increase the value of existing shares.
• Cut out the middleman. If you reinvest your dividends, a share buyback does it for you, saving you dealing charges.

Keep in mind that it’s a lot easier for companies to stop or reduce buybacks, compared to dividends, without denting sentiment too much.

Ultimately, there’s no clear winner in the buybacks vs dividends debate, both are good news for investors. But it’s important to know their differences.

Dividends are better for income, while buybacks are more geared towards capital growth.

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