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Savers Feel Forced to Invest But Not on Home Turf

Investor confidence is back at pre-crisis levels, but it appears to be the result of a stick rather than a carrot

Holly Cook 18 March, 2013 | 11:40AM

UK investors have been forced into buy mode but they’re no longer looking to spend at home, instead they’re shunning UK shares in favour of emerging markets opportunities.

23% of survey participants favour the higher-risk, higher-promise profile of emerging market investments

These findings, confirmed by a recent survey of Morningstar.co.uk users in partnership with the Association of Investment Companies, represents a switch away from domestic stocks on the back of a stock market rally that has seen the FTSE 100 return to pre-financial crisis levels.

Of the total 1,897 Morningstar users who participated, the majority (55%) said they plan to increase their stock market investments in the next few months. This compares to 45% in last year’s survey and puts investor sentiment at the highest level seen in eight years.

Of those planning on increasing their stock market investments in the next few months, the main reason stated by 25% of survey participants was that their savings accounts are paying too low a rate of interest. This scenario is one that we all know only too well, with record-low interest rates of 0.5% now in their fourth year. Indeed, saving cash can all too often mean a real loss as inflation outpaces interest.

However, not all investors feel that their hand has been forced: 23% of respondents said they were willing to inject more money into equity investments in the next few months based on market optimism. 

Looking to Emerging Markets

Despite this improved confidence and heightened interest in investing more this year, investors are not looking to invest in domestic companies. Last year, the UK was the most popular destination for investor money, with 20% saying this was their favourite region. This year only 15% prefer the UK and this is the lowest level recorded in the history of this survey. Six years ago, as the crisis was unravelling, 75% of investors favoured investing in UK opportunities.

Instead, it is now emerging markets that should expect to benefit from an influx of British investment money, with 23% of survey participants favouring the higher-risk, higher-promise profile of emerging market investments. Asia Pacific came second on the list, with 19% of the vote, pushing the UK into third place. In stark reversal, in 2007 when the UK was the favoured region, emerging markets appealed to only 6% of investors.

Similarly, just as British investors are more willing to take on risk from a regional perspective, they’re also keen to invest in the more volatile stocks on the market capitalisation scale, with smaller companies the most popular this time round. Previously blue chips had taken the top spot, but the jump from 12% of investors favouring smaller companies in 2012 to 28% today shows a marked increase in appetite for smaller stocks. Unfortunately this comes on the back of a strong rally for the UK small-cap sector last year, indicating that investors could be attracted by strong gains that have already taken place. Large-caps are no longer the flavour of the day but they remain popular, with 15% of investors favouring this area versus 22% last time.

Investing with ISAs

So how will these investors be putting their money into the stock markets? 78% of respondents said they will use their tax-free ISA allowance before the end of the current tax year and 40% said they are planning on investing only in stocks & shares ISAs, likely as an understandable reaction to the low rates offered on cash ISAs. Only 12% said they would use just the cash element of the ISA allowance, while 27% said they would make use of both the cash and stocks & shares allowances.

Using Funds and ETFs to Access Emerging Markets

Given the rising popularity of stocks & shares ISAs and the increased appetite for emerging market investments, investors will likely be looking to buy funds for their ISA wrappers since investing directly into an emerging market company is exceedingly difficult for private investors.

Investors looking to make use of the low-cost benefits of exchange-traded funds (ETFs) within their ISAs this year will do well to remember to seek out ETFs that are both domiciled in the UK and carry UK reporting status. Other ETFs are not eligible to be held in ISA accounts. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Holly Cook

Holly Cook  is Managing Editor of Morningstar.co.uk