UK shares are out of favour right now. Not only are they being shunned by large global investors, but it seems they are now being ignored by British retail investors too. According to research from the Investment Association, UK equity funds account for just 14% of the total funds held by British investors this year. Back in 2004, the figure was closer to 40%.
It’s not hard to see why UK shares are unpopular at present. For starters, the UK stock market lacks big, exciting tech companies such as Apple, Amazon, and Tesla. Secondly, there’s a significant amount of economic uncertainty here in the UK due to Brexit. Dumping UK shares entirely, though, may not be the best move. There are still plenty of attractive opportunities on the UK stock market.
World-class companies
In recent years, I’ve written about the importance of international diversification many times. By adding international shares to your portfolio, you can potentially enhance your overall returns and also lower your overall portfolio risk.
The UK market isn’t perfect. Many of the largest companies in the UK are struggling for growth. Meanwhile, the UK stock market only represents around 5% of the world’s total stock market capitalisation.
British investors should not avoid UK shares completely, however. Here in the UK, we do have plenty of world-class companies.
Top UK shares
Take Unilever for example. This legendary consumer goods company – that Warren Buffett tried to buy a few years back – is very profitable and also pretty much recession-proof. Long-term investors here have done very well. But with 50%+ of sales coming from emerging markets, there could be plenty more growth to come.
Alcoholic beverage company Diageo, which owns the likes of Johnnie Walker, Smirnoff, and Tanqueray, is another UK stock that I’d classify as world-class. It obviously faces some challenges right now due to Covid. Yet long term, the future looks exciting. Diageo believes that in the next 10 years, another 750m people worldwide will be able to afford its drinks.
Small companies, big gains
The small-cap area of the market is where UK shares really shine, I feel. At this end of the market-cap spectrum, there are some true gems.
One example of a top UK small-cap stock is Keywords Studios. It’s a video game support services company that serves all the big players in the industry such as Activision Blizzard and Electronic Arts. Between 2014 and 2019, revenues here climbed 775%. The share price is up nearly 1,000% in five years.
dotDigital is another UK small-cap technology stock that is worth a mention. It provides SaaS marketing solutions. It’s highly profitable and growing at a rapid rate. Its share price is up around 275% in five years.
These are just some examples of top UK stocks that have delivered stunning returns for investors over the long term. There are many more.
The takeaway? Don’t give up on UK shares. There are plenty of fantastic opportunities if you know where to look.
