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UK shares are dying out. Here are 3 reasons why!

The UK national flag in front of Canary Wharf skyscrapers where professionals trade shares for a living.
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Earlier today, I revealed four lessons I’ve learned in 35 years of buying UK shares. When I started out in 1986-87, investing was very different from what it is today. Trades were conducted on paper or by telephone. Delays sometimes meant deals were delayed for days or even weeks. And dealing commissions and other account costs were hefty multiples of today’s low charges. But the Eighties were also the Yuppie years, when the City of London boomed and millions jumped on the share bandwagon via government privatisations.

Of course, those days are long gone. Today, anyone with a few pounds can open an online share-dealing account and build a personal portfolio of UK shares and global stocks. But the UK stock market has three problems that haunt me today. Here they are:

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1. UK shares have gone nowhere since 1999

I clearly remember 31 December 1999, when the FTSE 100 index closed at 6,930.2 points, having hit an intra-day high of 6,950.6 the previous day. That night, the world partied hard in a millennium-ending global party. But markets soon came crashing down to earth, suffering a sickening crash that lasted until March 2003. More boom-busts happened, notably in 2007-09 and spring 2020. As a result, the FTSE 100 has gone nowhere this century. As I write on Tuesday afternoon, the index trades just below 6,998 points. That’s roughly 1% above its 1999 high — a truly terrible return over 20.5 years. Adding in cash dividends raises the total return to perhaps 4% a year. That’s scant reward for the risks of investing in UK shares.

2. The London Stock Exchange is shrinking

Back in 2005, 2,913 companies were listed on the London Stock Exchange. Alas, this represented a peak for the number of UK shares, which has declined steeply since. Here’s a snapshot of how the LSE’s base has shrunk over time:

Year-end No. of UK shares
2005 2,913
2007 2,588
2016 2,365
2018 2,099
2020 1,989

As you can see, the number of LSE-listed stocks has dropped markedly since 2005. Today, under 2,000 UK shares are listed in London, about a third (-31.7%) less than in 2005. Thus, the universe of listed British companies is shrinking, making UK-focused portfolios more concentrated. This shrinkage is largely down to three factors. First, takeovers and mergers combining two or more listed companies into one, reducing their numbers. Second, in this age of near-zero interest rates, many private companies find it easier to raise money from private investment groups, rather than by listing their shares in London. And the third reason is coming right up…

3. Foreign players are buying UK firms

So far, 2021 has seen a flurry of M&A (mergers & acquisitions) activity. Companies worldwide are being snapped up left, right, and centre. The UK alone has seen at least 366 announced or completed bids for British companies (including private businesses) from buy-out groups in 2021. Furthermore, cash-rich private-equity groups have made takeover approaches for 13 LSE-listed firms, including the UK’s fourth-largest supermarket. To me, this indicates that UK shares are cheap, especially when compared to pricey US stocks. Therefore, I expect this corporate raiding to continue through 2021. Indeed, we might see even more multi-billion-pound bids before the year is out.

Finally, despite this ongoing decline, I will continue to keep buying cheap UK shares. I snap them up for their strong cash flows, earnings, and dividends. Also, I just can’t find much cheaper assets anywhere else, so I’m building wealth back home in Blighty!

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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