How can Britain catch up with the US again? asks HAMISH MCRAE



Shares in London took a breather late last week, but the FTSE 100 index is still up 9 percent on the year before, hitting a record high of 8,474 on Wednesday.

We hit twelve closing highs in the past month, a record since the index was created in 1984.

Since the end of 2021, the Footsie has risen more than other major indices, including the S&P 500 and the Nasdaq in America, and ex-UK European shares.

But UK-listed companies still trade at a discount to US and continental European companies.

So the big question for British investors, and also for the future of London’s markets, is whether we will close that gap.

How big is it? Simon French, economist at estate agent Panmure Gordon, has made some sums.

You have to adapt to the companies on the Footsie being in relatively slow-growth industries, and the fact that we don’t have the huge high-tech sector of the US. Take this into account and he estimates that UK listed companies are still 17 percent undervalued compared to their global peers.

That is slightly better than the 19 percent discount at the end of last year, but still offers much more room for recovery. Put it this way, even if global equities were to remain flat in the coming months, there would still be room for London-listed shares to rise further.

There are many other indications that UK plc is undervalued. The set of foreign bids is one. Another example is the continued high level of investment by private equity houses. But if you look at investment by UK funds, the outflow of money has continued relentlessly since 2016. Simon French wonders whether this divestment is a product or a cause of London’s undervaluation. But the simple fact is that these flows have been negative for 82 of the past 97 months.

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HOW THIS MONEY CAN HELP

I hope the fund managers who shipped money out of the UK market are now feeling uneasy about missing out on the current boom. They certainly should. Will the vicious cycle of divestments that depress prices turn into a virtuous circle in which strong stock performance attracts more domestic and foreign money?

There have certainly been false mornings in recent years, so let’s be careful. But there is a mood change within the government. Jeremy Hunt is on the case, not ahead of time. Forcing funds to reveal where they put their savers’ money could change things.

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His likely successor as Chancellor, Rachel Reeves, has a knack for finance, and we’ll see how Labour’s somewhat incoherent ideas about boosting investment develop. There is also clearly a change of mood internationally, with the global investment community seeing an opportunity. There are many smaller companies, including those on the FTSE 250 index, that are still severely undervalued.

Foreign interests own 56 percent of London-listed shares, a staggering and rather disturbing statistic, so what they think matters most.

But let’s not forget UK retail investors, who control a further 11 per cent of the market. Those who have remained loyal to British listed companies in recent years have the right to celebrate now that they are back in the money. However, what would really change the entire investment landscape would not simply be a revaluation of existing businesses, but rather the creation of more new ones.

By European standards, we are not doing badly in Great Britain, with relatively many start-up companies.

But Europe is not the right benchmark. Why not create billion-dollar companies like Microsoft or Apple, which Hunt talked about last week?

A few days ago I was struck by a speech by David Miliband, the former Labor foreign secretary, now based in New York, during a rare visit to Britain. He contrasted Europe’s poor growth with that of the US over the past two decades.

His prescription was that Britain would work more closely with the EU. I took away a very different message: we must use our independence to try to copy the US.

That is what will really matter in the coming years.

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