Can’t pension funds back Britain? A era in the past they owned half the UK quoted market, says HAMISH MCRAE
This should be one of the unloved bull markets of all time. Last week, the FTSE 100 index moved solidly above 8,000, solely to fall back.
Yet each time it clambers up a bit, one thing comes alongside and whacks it on the pinnacle. The index is up round 17 per cent from its lows final October – all proper, that is not technically a bull market till it’s 20 per cent up – and it is without doubt one of the uncommon asset teams that provides actual worth.
The dividend yield, even after the current climb, continues to be round 3.6 per cent. That is just about the center of its vary over the previous 20 years, and it compares with 2 per cent on the Dow Jones and 1.6 per cent from the S&P 500. Yet {most professional} traders are cautious. Why?
Well, a part of the reply is that the UK stays retro among the many funding elite, for causes that everyone knows about. Part is that the Footsie is closely weighted with ‘previous’ industries corresponding to mining, banking, insurance coverage and so forth, quite than ‘new’ high-tech ones. But I feel extra necessary is that UK pension funds and insurance coverage firms do not spend money on British enterprise. A era in the past they owned half the UK quoted market.
Now, in line with the latest ONS figures, for the tip of 2020, pension funds personal only one.8 per cent of the market and insurance coverage firms 2.5 per cent. Pension funds have been pushed by the regulators into gilts and different mounted curiosity securities, and by the decrease returns on equities following Gordon Brown’s controversial tax raid on dividends in 1997.
Hard work: The UK stays retro among the many funding elite
The swap to gilts labored adequately whereas long-term rates of interest declined, and gilt costs (which transfer inversely to yields) climbed. But the collapse of bond costs final yr was a disaster for a lot of pension funds, together with the biggest one, the Universities Superannuation Scheme. As we reported final week, it has misplaced multiple fifth of its total worth within the 9 months to the tip of September.
One results of UK establishments shunning British firms is overseas holders personal 56 per cent of UK-quoted shares. UK people, that is us, personal solely 12 per cent. But at the least we’re not fairly as down on UK plc because the professionals, and I’m glad to say in current weeks we could have been rewarded for our help.
I feel this final level – that our market is dominated by foreigners – goes a protracted approach to explaining the quirks of current weeks, the place some US-specific occasion that has nothing to do with the London market boosts or hammers share costs.
America accounts for some 60 per cent of worldwide fairness valuation, and share costs there are caught in a tug-of-war between individuals who comply with US customers and individuals who comply with the Federal Reserve. Consumers are nonetheless spending, or at the least they’re in mixture for there are pockets of great weak point, and whereas they proceed to take action they help company earnings. There is a tech slowdown, and lots of job losses, however retail gross sales are holding up. In January, they rose by the biggest quantity for 2 years.
The Fed, however, is anticipated to tighten additional. It is irritating that each time a Fed governor makes some comment, shares soar in some way right here in addition to within the US. But that’s the world we reside in.
It is especially irritating as a result of US financial situations are fairly completely different from these right here. In shorthand, in America the principal driving pressure for inflation has been extra home demand, whereas within the UK it has been principally imported gasoline and meals costs. We each have traditionally excessive inflation, however whereas larger rates of interest would be the proper coverage there, they’re in all probability the fallacious one right here. (US inflation ran nicely forward of ours final summer time; now we’re operating forward of them.)
So what occurs subsequent right here will rely partly on this tussle between the Fed and American customers. But there are additionally issues that UK authorities can do to enhance the attractiveness of investing within the London market.
We needs to be asking whether or not laws which have the impact of discouraging UK pension funds and insurance coverage firms from investing in home firms have really benefited British savers.
We also needs to be asking whether or not it is extremely intelligent to extend company tax to 25 per cent, and push extra firms corresponding to AstraZeneca to construct their new plant in Ireland the place there’s a 12.5 per cent tax fee. This is not politics. It is widespread sense.
Authorities may help to make investing right here extra engaging.
