London shares took a breather at the end of last week, but the FTSE 100 index is still up 9 per cent year-on-year and hit a record high of 8,474 on Wednesday.
We have had 12 closing highs in the last month, a record since the index was founded in 1984.
Since the end of 2021, the Footsie has risen more than other major indices, including the S&P 500 and Nasdaq in the United States, and European stocks excluding the United Kingdom.
But companies listed in the UK still trade at a discount to those in the US and continental Europe.
So the big question for UK investors, and indeed for the future of London markets, is whether we are going to close that gap.
The American dream: the United Kingdom should use its independence to try to copy the United States
How big is it? Simon French, economist at brokerage Panmure Gordon, has done some math.
You have to adapt to Footsie companies being in relatively slow-growing industries and the fact that we don’t have the huge high-tech sector in the United States. Taking this into account, it estimates that UK-listed companies are still 17 per cent undervalued against their global peers.
That’s slightly better than the 19 percent discount at the end of last year, but still leaves much more room to recover. Let’s put it this way: even if global stocks were to remain stable in the coming months, there would still be room for those listed in London to continue rising.
There is plenty of other evidence that UK plc is undervalued. The chain of foreign offers is one. The continued high level of investment by private equity firms is another. But if you look at the investments of British funds, the outflow of money has continued unabated since 2016. Simon French questions whether this disinvestment is a product or a cause of London’s undervaluation. But the fact is that those flows have been negative for 82 of the last 97 months.
I expect fund managers who have been sending money out of the UK market now feel uneasy about missing out on the current boom. They certainly should. So will the vicious cycle of disinvestment that pushes prices down turn into a virtuous cycle in which strong stock performance attracts more domestic and foreign money?
There have certainly been false dawns in recent years, so let’s be cautious. But there is a change of mood in the government. Jeremy Hunt is on the case, not before time. Forcing funds to reveal where they are putting their savers’ money could change things.
His likely successor as Chancellor, Rachel Reeves, does understand finance, and we will see how Labour’s somewhat incoherent ideas about boosting investment play out. There is also clearly a change in mood internationally, with the global investment community sensing an opportunity. There are many smaller companies, including those in the FTSE 250 index, that remain severely undervalued.
Foreign interests own 56 per cent of London-listed shares, a surprising and rather worrying statistic, so what they think matters most.
But let’s not forget UK retail investors, who have another 11 per cent of the market. Those who have stuck with UK-listed companies over the last few bleak years have a right to celebrate now that they are making money again. However, what would truly transform the entire investment landscape would not simply be a revaluation of existing companies, but rather the creation of more new ones.
We are not doing badly in the UK by European standards, with relatively high rates of business creation.
But Europe is not the appropriate reference point. Why aren’t we creating trillion-dollar companies like Microsoft or Apple, as Hunt talked about last week?
My attention was drawn to a speech given a few days ago by David Miliband, former Labor foreign secretary, now based in New York, on a rare visit to the UK. He contrasted Europe’s poor growth with that of the United States over the past 20 years.
His prescription was for the UK to work more closely with the EU. I took away a quite different message: we should use our independence to try to copy the United States.
That’s what will really matter in the coming years.