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UK stocks are set to achieve their best performance in the first half of the year since 2021. Yet, worries about unpredictable trade policies and increasing government debt have disturbed investor confidence in the idea of “US exceptionalism.” With this in mind, isn’t it the ideal moment for UK investors to support local markets?
In contrast, while international investors are increasingly investing in UK equities, domestic investors appear to be capitalizing on the market upswing to sell off their shares. Recent data from EPFR and Goldman Sachs shows that foreign investments in UK stocks have soared to their highest levels in three years, while local investors have been net sellers throughout this year. This represents a significant divergence from trends observed across the rest of Europe, according to Goldman analysts.
This distinctly British situation extends beyond issues of national pride. Goldman has found evidence that higher local stock ownership is linked to increased equity valuations. The bank believes that the current shortage of UK buyers has led to the FTSE 100 trading at a discount compared to other key indices. This situation raises the cost of capital for companies listed in London, making expansion more challenging and prompting companies like fintech Wise to relocate their primary listings to New York.
Several factors contribute to this trend. On one hand, pension funds are increasingly moving away from equities in general, particularly UK stocks. For example, Scottish Widows plans to significantly reduce its investments in UK equities, continuing a long-established trend. On the other hand, UK households show a stronger tendency to save cash or invest in real estate than to purchase stocks.
The government is making efforts to address the first issue. Initiatives aimed at consolidating small pension schemes, unlocking surpluses in defined benefit plans, and improving the assessment of value for money from different schemes should help increase UK investments, even if only slightly.
However, stimulating individual investment will require more than these measures. Easier access to financial advice and support would be beneficial. The Financial Conduct Authority is set to provide updates on its ongoing “advice guidance boundary review.”
Reforming tax-free individual savings accounts is also necessary. Some officials in the City advocate for a limit on cash savings, but a more effective approach would be to create a unified Isa product that facilitates switching between cash and investments. This would allow cautious new investors to gradually explore and enter the financial markets.
The most significant challenge, however, lies in fostering a cultural shift alongside policy reforms. Nearly a third of those surveyed in a recent YouGov poll considered investing akin to “gambling.” This perspective persists, even though inflation diminishes cash savings, and the housing market has historically lagged behind equity markets. If this mindset continues, the UK will indeed be taking a gamble—one that could threaten the stability of its market future.
nicholas.megaw@ft.com
