The recent performance of the FTSE-100 following the election and promises of increased public spending has sparked discussions on the state of the UK market. Despite underperforming after the Brexit referendum, UK market returns have now caught up with global benchmarks, showcasing a turnaround. The FTSE-100 is currently considered a ‘cheap’ market, offering more earnings per pound invested compared to historical trends.
The UK’s value market status, coupled with low exposure to high potential sectors, positions it well in case of a global economic slowdown. With interest rates expected to remain ‘higher for longer,’ the UK market’s focus on cheap stocks with stable earnings outlooks presents an attractive investment option. The ongoing bid activity for UK stocks further validates the market’s value, with bid premiums for FTSE 350 stocks estimated at 40% by Peel Hunt.
While short-term gains from bid activity are beneficial, the long-term implications of de-equitisation, where retirement of shares exceeds new issuances, raise concerns about the country’s investment capability. A portion of equity capital needs to be domestically owned and long-term to support investments in businesses and infrastructure. The Labour party’s commitment to continuing capital market reforms is welcomed, with a focus on pension assets.
The current state of the UK’s pension policy raises questions about its alignment with national interests. Despite having one of the largest pension markets globally, only 4% is invested in UK equities, significantly lower than other developed markets. Last year’s Mansion House reforms saw pension providers committing to increasing allocations to unlisted equities by 2030, indicating a shift towards diversification.
As discussions around state intervention in investment markets continue, the need for a balanced approach to pension allocations to avoid politicization is crucial. Enhancing last year’s reform package with a more hands-on approach by the new government could create a better funding environment to support growth. Overall, the focus on shaping effective pension policies for national interest remains a key priority for policymakers and investors alike.