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.

PROMOTED VIDEO
Life and Style
The veteran poverty campaigner Sir Bob Geldof issues a stark challenge to emerging economies at the Melbourne HIV/Aids conference
health
Arts and Entertainment
Benedict Cumberbatch and John Malkovich talk Penguins of Madagascar at Comic-Con
comic-con 2014Cumberbatch fans banned from asking about Sherlock at Comic-Con
Arts and Entertainment
Chris Pratt stars in Guardians of the Galaxy
filmGuardians Of The Galaxy should have taken itself a bit more seriously, writes Geoffrey Macnab
News
Sir Chris Hoy won six Olympic golds - in which four events?
news
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Lars Ulrich of Metallica performs on the Pyramid Stage at Glastonbury 2014
people
Arts and Entertainment
film
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
video
Life and Style
tech
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
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

Business Analyst

£300 - £350 per day: Orgtel: Job Title: Business Analyst Rate: £300 - £350 per...

Trade Desk Specialist (Linux, Windows, FIX, Finance, Networks)

£60000 per annum: Harrington Starr: Trade Desk Specialist (Linux, Windows, FIX...

Associate CXL Consultant

£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

Project Manager - ETRM/CTRM

£70000 - £90000 per annum + Job Satisfaction: Harrington Starr: Project Manage...

Day In a Page

Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform