Savers have abandoned UK – now they’ll lose out when the FTSE soars

london with man
london with man

The FTSE 100 has hit high after high recently, and significant further gains could lie ahead.

If they do, I worry that UK investors will miss out.

Our pensions and savings used to be heavily biased towards British stocks and shares, but over time the pendulum has swung in the opposite direction.

Defined benefit pension funds and insurance companies owned around half the UK equity market back in the 90s. Today it’s just 3pc.

Popular trackers that mirror indices like the MSCI World Index have just 4pc exposure to the UK market. More than 70pc of that index is in US stocks.

Over recent years – and certainly since the Brexit vote – investing globally rather than in the UK has been a smart move. Looking towards America has proved especially profitable.

But there’s a growing argument to be made that this is changing.

In Japan, shares have risen 50pc in the past 18 months. It shows what can happen when a country so long in the doldrums “breaks out”.

Could that happen here?

Here’s why I’m so bullish on UK equities.

The shifting pensions landscape

Even without a change in asset allocation, UK pension funds will be buying more UK shares.

Research from Goldman Sachs shows old-fashioned final salary pension schemes – also known as defined benefit (DB) schemes – currently hold seven times the assets of modern defined contribution (DC) schemes.

But DB schemes are shrinking, whereas DC schemes are taking in over £20bn a year in fresh employee and employer contributions. DC schemes will be bigger by 2032.

DC schemes have nearly half their money in equities, compared with just 15pc for DB schemes – so, three times as many UK shares, proportionally. It means pension schemes are now net buyers of UK shares, even without expressing any positive asset allocation view.

I don’t want to exaggerate the impact of this shift in the pensions landscape, but it helps. If pension funds were to reconsider their allocation to Britain, that would make an even bigger difference. They would certainly struggle to allocate less than they do today.

In Australia and Italy pension funds are much more patriotic – investing at least a third in their own markets. Little wonder politicians of all parties are considering policy measures to encourage more allocation to domestic markets.

British shares are good value

Britain still looks good value relative to its own history and to the rest of the world.

Only technology stocks are dearer than their 10-year average. Some sectors – consumer staples, utilities, financials and telecoms – look extremely cheap versus history.

Internationally speaking, UK shares are among the least loved in the world. In developed markets the UK is the cheapest region.

The make-up of the FTSE 100 and the American S&P 500 are very different, of course.

Even so, looking at the commonly used price-to-earnings ratio valuation, the FTSE, at 11.4x, is nearly half the rating of the S&P 500, at 20.7x. This is much more about the value within the UK than the US being inflated.

There’s a lot of hand wringing today about the declining number of companies wanting to be listed in the UK. I think that’s far more to do with valuations currently than anything else.

Start valuing British shares more realistically and more companies will want to be listed here.

Our economy is proving resilient

The British economy has plenty going for it today – if you can see through the gloomy headlines.

On average, Britons have more excess savings than Americans and Europeans. Data suggests most of the population are coping with a more inflationary environment.

Retail sales declines have stabilised. There’s real wage growth. The UK is becoming less dependent on others for its energy as renewables grow. Business confidence is rising.

The upcoming election might create a new political backdrop – continuity where it matters and, perhaps, a more constructive relationship with Europe.

Will British investors win?

My big concern revolves around who will benefit.

Right now it looks like it will be the industrial buyers, overseas investors and private equity houses that are pouncing on British companies and picking them up at the right time.

The hefty premiums to the market price they’re often paying underlines just how cheap UK shares have become and the opportunities that lie here.

I’m worried that British investors will miss out – whether that’s because they have their money in global trackers, in pension funds that shadow global index equity allocations or with wealth managers that have followed the trend of selling down the UK and are yet to recognise the opportunity.

We know British companies earn their revenues around the globe, but it seems to me a shame that, in many cases, the people generating this wealth – the hard-working employees helping to deliver strong profits – risk not getting to share in it.

In the 90s investors had to be encouraged to embrace a broader geographic allocation. I believe it’s now time we encourage them to buy British.

Paras Anand is chief of information at investment manager Artemis