The UK economy and the UK stock market, though linked, aren’t one and the same.
The FTSE 100 is a leading large-cap UK equity index representing the 100 largest companies trading in the country.
However, over 80% of the FTSE 100 companies’ revenue now comes from overseas.
This makes the index one of the most international stock indices globally, which is more of a proxy for global earnings than the domestic economy.
It also underlines a reliance on how performance can be impacted by the strength or weakness of the US dollar versus the sterling.
What about the FTSE 250 and small-caps?
Contrast this with the FTSE 250 and smaller cap indices which get a larger proportion of their revenue from the UK economy.
Here, we can showcase the nation’s strengths in industrials, technology, real estate, and notably service based, like financial services and insurance.
Further down the market, we can even highlight the UK being a niche innovator in biotech and clean technology.
On the traditional side, the UK has been evolving from a traditional manufacturing economy into high-value and skill-led innovation. Think about precision engineering, renewables tech and advanced chemicals.
These are becoming the bedrock of the UK’s competitive edge which not only supports the domestic economy, but provides additional growth with exports to key markets across Europe, North America and Asia.
With how different and diverse the indices are, it begs the question of where do you start when looking for growth or income opportunities?
This article isn’t personal advice. If you're not sure if a course of action is right for you, ask for financial advice. Remember, all investments can rise and fall in value, so you could get back less than you invest. Past performance also isn’t a guide to the future.
Growth opportunities in the UK – where should investors look?
If you’re investing with growth in mind, UK-listed companies with genuine global presence and operations are a compelling path.
The thought in this case would be through large-cap companies with strong global footprints, which you would typically find listed on the FTSE 100.
But for a domestic focus, the UK is home to many smaller companies that are nimble, innovative and often under-researched.
However, this part of the market can be more volatile and risky, so careful selection, with good diversification, is generally the approach to building a strong portfolio with a long-term view.
While the FTSE 100 might be skewed towards oil & gas, mining and pharma, mid-caps and smaller innovators can offer diverse growth avenues.
And if your research is focused primarily on what’s happening locally, the smaller indices could possibly be your starting point.
Income opportunities in the UK – where should investors look?
On the income side, the UK tends to shine quite above the rest and is sometimes referred to as having ‘dividend discipline’.
That’s because the UK market as a whole is one of the highest yielding among developed equity markets.
What’s more interesting is many companies have track records of growing their dividends every year for decades. This is a compelling story, but it’s important to understand that dividend payouts can vary and aren’t always guaranteed.
Dividend investing isn’t just about the yield today. It’s also about how those payments compound.
Over a long enough period of regular payouts, many investors could find their cumulative dividends exceed the amount they originally invested, and that’s before any capital growth is taken into account.
Another strength of income investing is its rhythm and how this can be paired with your lifestyle and requirements.
Funds with regular payouts, often paid quarterly or semi-annually, can help investors plan around life’s financial needs – whether that’s funding retirement, supporting dependents or even replacing a salary in a more flexible lifestyle. As a prudent investor, you should also be prepared for shortfalls or excess income due to the variability, and not rely solely on a forecast to cover any fixed costs.
Income versus growth – how to build a balanced portfolio
One of the biggest misconceptions in investing is that you have to choose between growth or income. In reality, the two can work in balance and really complement each other.
Growth investments can drive longer-term wealth accumulation, helping you keep ahead of inflation and meet your future financial goals.
Income investing on the other hand can provide further support with regular cash flows, which could supplement any needs as your lifestyle evolves.
You normally have a choice between income paying and accumulation units when you invest in a fund, with some flexibility to switch between the two without triggering a capital gains tax.
Want help building an investment portfolio?
Whether you’re looking for income, growth, or to invest in different parts of the world, HL’s Building Block funds can help.
HL’s range of Building Block funds are designed to give you a convenient and diversified way to invest. You can choose from a range of funds invested in a variety of ways, depending on your needs and goals.
The HL Building Block funds are run by Hargreaves Lansdown Fund Managers Ltd., part of the Hargreaves Lansdown Group.