BLOG: How to cash in on ‘boom boom Britain’
The Chancellor’s Budget last week confirmed that the British economy is on the mend. His optimistic picture of a Britain back on track was seconded by the latest predictions from the Office for Budget Responsibility (OBR), which raised its forecasts for UK growth in 2014 from 2.4% to 2.7%.
A flurry of good news has followed this week – from rising house prices, to falling inflation and fuel costs – which paints a brighter picture of the UK economy than we have enjoyed for many years.
Unsurprisingly, it provides a pretty positive backdrop for the stock market. But if ‘boom boom Britain’ looks set to continue, how should savers cash in? I’ve set out three key considerations below for savers looking to make the most of British recovery.
1. Size matters
It’s no secret that domestically focused small and mid-cap companies have performed better than larger ones in the UK for some time. They are the clearest beneficiaries of domestic recovery, and smaller companies in the UK have outperformed since the dot.com crash bottomed out in 2003. If the recovery continues as I expect it to in the UK, these domestically focused companies should continue to do well. However, the outperformance of these smaller stocks means that in many cases they are now quite highly-valued. Larger British companies such as those in the FTSE 100 are now looking better-valued in comparison. Hedge your bets with a good balance between large and small companies in your UK shares portfolio.
2. Re-invest your income
One of the side-benefits of the relative underperformance of the UK’s larger companies is the fact that they continue to offer a pretty attractive dividend yield to investors. According to Goldman Sachs, the FTSE 100 has an average dividend income of 3.7% compared with 2.7% for the FTSE 250 mid-cap shares. Dividend income is one of the biggest contributors to the total return from shares over time and if you can buy a share with a high and sustainable dividend at a time of generally rising share prices, the combined effect can be a powerful double whammy.
3. Don’t forget – whatever your investments, use your tax wrappers efficiently
Savers may be sick of hearing this by now, but with only a few days to go until the end of the tax year, this might be the most important bit of guidance when it comes to cashing in on markets (recovery or otherwise). In the run up to the 5th April, the potential to shelter your savings – and any returns they make in the market – is huge. Your ISA alone can protect £11,520 this tax year. While most people are unlikely to be able to save this much over a year, it does demonstrate the importance of doing the research into what you’re entitled to. Failing to do this could result in avoidable losses to your savings pot, whether Britain booms or not.
Tom Stevenson is Investment Director at Fidelity Personal Investing.