Outlook: Foreigners see a bargain in UK stock market

THIS WEEK, UK shares reached a new record high, finally superseding the peak they achieved at the turn of the century. Come again? OK, OK, so the index that reached its new peak was, in fact, the FTSE 250. Made up of companies whose earnings substantially and in some cases wholly come from Britain, the FTSE 250 has been flirting with the record for some months now.

Yet the much larger FTSE 100, which is populated by multinationals, still stands at just 71 per cent of its peak. Perhaps regrettably, the FTSE 100 accounts for 80 per cent of the total value of UK quoted companies. The FTSE 250 is just 18 per cent, so it has little impact on the overall value of the UK stock market. None the less, the FTSE 250's soaraway performance does rather explode the myth that the relative underperformance of the UK stock market over the last eight years compared with stock markets in other developed economies is down to anti-business policy by the Labour government, over-regulation, and the decision to abolish the tax credit on dividends.

I don't want to act as an apologist for the Government, but I've never found this argument convincing. The relative performance of the two indices seems finally to explode it. More than a half of earnings in the FTSE 100 come from overseas, whereas in the FTSE 250 it is only about 35 per cent. If it was Labour that was doing the damage, logically the 100 should be outperforming the 250.

In fact, the real causes of underperformance are vastly more complex. For instance, nearly a quarter of the total value of the UK stock market is accounted for by just four companies - BP, GlaxoSmithKline, Shell and Vodafone. The vicissitudes of these stocks have virtually nothing to do with the UK economy, even though all four companies are domiciled here. Rather they are ruled by forces, incompetences and sentiment that are global in nature. Three of them are in any case run by foreigners.

The FTSE 100 is dominated by sectors which are international in nature - pharmaceuticals, telecoms, financials and mining - whereas the 250 is much more domestically orientated, property, retailing and housebuilding all being sectors which performed exceptionally well last year.

There are other factors too which lead to the conclusion that the underperformance of the UK stock market is more a structural than a political phenomenon. If it were all down to Labour policy, as sometimes suggested in the City and the Tory press, then earnings would be flat or lower than they were when Labour came to power.

Since the value of the stock market has barely moved in that time, valuations should be correspondingly the same or higher. In fact they are lower. Indeed, in the 250, valuations are significantly lower. The earnings multiple on the 250 has fallen from 25 to 19 since 2002, despite the rise in the index, this because earnings have been storming ahead.

So if in fact corporate profits are rising, how to explain the relative underperformance versus the US and Europe? The abolition of the tax credit on dividends has obviously made UK equities less attractive than they were, but the more important reason in my view is structural selling by the big pension funds and life assurers.

This in turn has quite a bit to do with increased solvency regulation, though much of this is international in nature rather than imposed unilaterally by the UK. However, the bigger influence is simply the fact that the UK has a much bigger funded, final-salary pension sector than Europe. Since the late 1950s, pension funds have been substantial buyers of UK equities. Now that these funds are maturing and closing, meaning that liabilities must be matched by the "safer" assets of bonds and cash, they are wholesale sellers.

Indeed, with the retail investor still substantially out of the stock market, the only significant source of buying for the UK market is from overseas investors. Strange that it takes a foreigner to recognise a UK bargain, a fact confirmed by Office for National Statistics figures yesterday, which show inward investment by overseas investors and companies on a strongly rising trend. For them, at least, Britain seems an attractive place to be. As Labour sails towards another landslide victory at the polls, that seems to be the judgement of voters too. The reality is that the UK economy has rarely been in better shape, even if the stock market as a whole is still in the doldrums.

Start your day with The Independent, sign up for daily news emails
News
Leah Devine is only the ninth female to have made the Young Magician of the Year final since the contest began more than 50 years
peopleMeet the 16-year-old who has set her heart on being the first female to win Young Magician of the Year
News
Jonathan Anderson was born in Northern Ireland but now based between London, where he presents a line named JW Anderson
peopleBritish designer Jonathan Anderson is putting his stamp on venerable house Loewe
News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing