We should copy the US to catch up, says HAMISH MCRAE

Shares in London took a bit of a breather at the end of last week, but the FTSE 100 index is still up 9 per cent on the year and touched an all-time high of 8,474 on Wednesday.

We have had 12 closing highs in the past month, a record since the index was founded in 1984.

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

But UK-quoted companies still trade at a discount vis-a-vis US and continental European ones.

So the huge question for UK-based investors, and indeed for the future of London markets, is whether we are going to close that gap.

The American dream: The UK should use its independence to try to copy the US

How big is it? Simon French, economist at brokers Panmure Gordon, has done some sums.

You have to adjust for the companies on the Footsie that are in relatively slow-growing industries, and the fact that we don’t have the huge high-tech sector of the US. Allow for this, and he calculates UK-quoted companies are still 17 per cent undervalued against their global peers.

That is a bit better than the 19 per cent discount at the end of last year, but still leaves lots more room to recover. Put it this way: even if global equities were flat in the coming months, there would still be scope for London-listed ones to climb further.

There is lots of other evidence that UK plc is undervalued. The string of foreign bids is one. The continued high level of investment by private equity houses is another. But if you look at investment by UK funds, the outflow of money has continued relentlessly since 2016. Simon French asks whether this disinvestment is a product or a cause of London’s undervaluation. But the plain fact is that those flows have been negative for 82 of the last 97 months.

I hope the fund managers that have been shipping money out of the UK market now feel a sense of unease at having missed out on the current boom. They certainly should do. So will the vicious circle of disinvestment pushing prices down switch to a virtuous circle where strong share performance attracts more domestic and foreign money?

There have certainly been false dawns over the past few years, so let’s be cautious. But there is shift of mood in government. Jeremy Hunt is on the case, not before time. Forcing funds to disclose where they are placing their savers’ money may shift things.

His probable successor as Chancellor, Rachel Reeves, does understand finance, and we will see how Labour’s somewhat incoherent ideas about boosting investment develop. There is also clearly a shift of mood internationally, with the global investment community sensing an opportunity. There are a lot of smaller companies, including those on the FTSE 250 index, that remain grossly undervalued.

Foreign interests own 56 per cent of the London-quoted shares, a stunning and rather troubling statistic, so what they think matters most of all.

But let’s not forget UK retail investors, which have another 11 per cent of the market. Those who have stuck with UK-quoted companies through the bleak past few years have a right to celebrate now that they are back in the money. What would really transform the whole investment landscape, however, would not be simply a revaluation of the existing enterprises, but rather the creation of more new ones.

We are not doing badly in the UK by European standards, with relatively high rates of start-ups.

But Europe is not the right benchmark. Why are we not creating trillion dollar businesses such as Microsoft or Apple, as Hunt talked about last week?

I was struck by a speech a few days ago by David Miliband, the former Labour foreign secretary, now based in New York, on a rare visit to the UK. He contrasted the poor growth of Europe with that of the US over the past 20 years.

His prescription was for the UK to work more closely with the EU. I took away a rather different message: we should use our independence to try to copy the US.

That is what will really matter in the years ahead.