Is it necessary for ISA investors to own UK shares?

Although many of us are already overexposed, the UK government wants ISA investors to hold more UK stocks and nash

It's pretty useless to speculate about this year's budget, in part because plans obviously change every few days. However, it's worth taking a quick look at the ongoing rumors that the chancellor wants to force or convince private investors to keep a certain amount of UK stocks in their individual savings accounts (ISAs). To be biased, I think this idea is ridiculous for reasons other than the difficulty of determining what is sufficiently British. An exchange-traded fund that tracks the S&P 500? An investment trust with half of its assets in Asia? International miner Anglo American after moving its headquarters to Canada? The ISA regulations are already so ridiculous that we don't need any more.

The notion that investing in British stocks should be exchanged for ISA tax relief is misguided. The purpose of ISA and pension tax relief is to encourage people to save money for retirement and other necessities. Each investor's risk and reward balance should be taken into consideration when allocating that money. Even if that means there are no UK stocks, that is still the correct result. The government should figure out why companies don't want to list and why investors don't want to make voluntary investments and address that if it hopes to save the UK market. Resolving the underlying issues will always be preferable to using coercion.

The UK stock market already has a large number of ISA investors.

It nevertheless poses a valid query. The UK makes up around 3.5 percent of the MSCI World index of developed markets, so what is a neutral level of investment in British stocks? That is a place to start. These indices, however, have their own biases due to limitations like free float and the high valuation of US markets, which currently make up 73% of the MSCI World. For an alternative viewpoint, consider equal weight indices, which generally represent the quantity of stocks in each market and, consequently, the number of investment opportunities; valuations and free float are irrelevant. The UK's share of the MSCI World Equal Weighted index is roughly 5.5%, while the US's share is roughly 41%.

MSCI.

Thus, neutral exposure to the UK is approximately 5%. It would be lower if emerging markets were taken into account, but access restrictions cause some issues, so let's keep things straightforward.

It's not as simple as you might think to find out how much an average ISA investor holds. ISA managers are asked to report the amount held in various investments by HM Revenue & Customs, but the categories it requests are confusing, out-of-date, and overlapping, and it never just says "UK shares" anywhere. However, according to information gathered by the Investment Association and given to Bloomberg, ISA investors have 23 percent of their total holdings in UK stocks and, consequently, about a third of their equity holdings in the UK. ISA investors are already overweight in the UK; you can find other numbers, but the narrative is consistent. The UK has held its own against the world, excluding the USA, in recent years, so perhaps that makes sense. However, we shouldn't be compelled to carry more.