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British stocks are on track for their best half-year since 2021. Meanwhile, concerns about unpredictable trade policy and spiralling government debt have shaken a long-held investor belief in “US exceptionalism”. If ever there were a time for British investors to buy local, surely it would be now?
Instead, while foreign investors are pouring in, Brits seem to be using the rally as yet another opportunity to sell. Overseas inflows into UK equities recently hit their highest level in three years, according to data from EPFR and Goldman Sachs, while domestic investors have been net sellers all year. That is a “major difference” with the pattern in the rest of Europe, Goldman analysts say.
The peculiarly British issue is more than just a question of national pride. Goldman’s analysis found that higher rates of domestic stock ownership correlate with higher equity valuations, and the bank thinks a lack of UK buyers has contributed to the FTSE 100’s valuation discount compared with other major indices. That means a higher cost of capital for London-listed companies, which makes it harder to grow and encourages moves such as fintech Wise’s decision to shift its primary listing to New York.
There are several factors behind the trend. At one end of the scale, pension funds have been shifting focus away from equities in general and domestic equities in particular. Scottish Widows’ plan to slash its allocation to UK equities builds on a decades-long pattern. At the other end, individual households in the UK are far more likely to hoard cash or invest in property than buy stocks.
The government is trying to fix the first part. Moves to consolidate small pension schemes, free up surpluses in defined benefit schemes and better measure the value for money offered by different schemes should all boost UK investments, even if only marginally.
However, it will take more than that to encourage investment by individuals. Making it easier to offer financial advice and support would help. The Financial Conduct Authority is due to update on the next steps of its long-running “advice guidance boundary review”.
Tax-free individual savings accounts should also be reformed. Some City figures are pushing for a cap on cash savings, but a better move would be to create a single Isa product that makes it easier to switch between cash and investments. This would let nervous first-timers gradually dip their toes into markets.
The hardest challenge, however, is to enact a cultural shift to go alongside the policy reforms. Almost a third of respondents to a recent YouGov survey thought investing was like “gambling”. This despite the fact that cash savings are eaten away by inflation and the housing market has underperformed equities over the long run. If that attitude continues, the UK will indeed be gambling — with the future of its market.
nicholas.megaw@ft.com