AJ Bell’s Laith Khalaf comments on latest ONS data

by | Dec 4, 2023

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Overseas investors hold a record high 57.7% of the UK stock market, according to data released by the ONS today. The proportion of UK shares held by UK individuals fell to 10.8% and the proportion held by pension and insurance companies fell to 4.2%, down from 45.7% in 1997 and the lowest on record.

Laith Khalaf, head of investment analysis, AJ Bell:“The UK stock market is increasingly becoming the preserve of overseas investors, and in a globalised market economy this should perhaps come as no surprise. Large flows of money from investors across the world, from US mutual funds to Sovereign Wealth Funds, are naturally going to dwarf the savings pots of the 50 million or so adults on this here island. Although the UK makes up an increasingly small part of the MSCI World Index because of its lacklustre performance versus the S&P 500, at 4% it’s still big enough to attract attention from globally diversified funds worldwide. In a way it’s reassuring that overseas investors still want to hold the UK stock market, despite its poor relative performance and questionable ESG credentials.

“UK investors have also clearly been struggling from cost of living pressures which have naturally dented their propensity to invest in UK shares. That’s compounded by the fact that in recent years UK investors have increasingly turned their eyes overseas and chosen to sell down their UK equity funds, largely in favour of global offerings (see chart below). According to data from the Investment Association £44 billion has been withdrawn by funds investing in UK equities since 2016.


“Pension funds and insurance companies have also been retreating from UK shares. Rules introduced at the turn of the century tied defined benefit pension liabilities to corporate bond yields, which led to a gradual but overwhelming retreat from equities and into bonds for these schemes, as a risk mitigation exercise. Meanwhile the new brand of pension default funds in automatic enrolment schemes have ploughed a cautious approach, with heavy bond exposures, even for younger pension investors who are probably best placed to ride the ups and downs of the stock market. Where default funds allocate a proportion of their investments to shares, global benchmarking also means that the UK often makes up a relatively small proportion of their overall portfolios.

“The government is desperately trying to boost pension investment in UK enterprises through its Mansion House reforms and the launch of Long Term Asset Funds. Ultimately though, pension schemes are responsible to their members for the returns delivered, and naturally these are compared against global benchmarks. As a result, the thing that will really prompt pension schemes and other investors to plump for UK shares is the prospect of superior returns. The UK stock market does look undervalued compared to its own history, and the S&P 500. However, it takes a brave, contrarian investor to go against its recent weak performance and negative sentiment towards UK stocks, especially when you can simply hide behind an indexing approach which just follows the global market. 

“The government will also be hoping that their sale of NatWest shares will spur a fresh wave of investors in the way the privatisations of the 1980s did, on the back of the iconic Tell Sid campaign. However, younger Sids might well be more interested in crypto than a dusty old bank paying solid dividends. And with money thin on the ground as inflationary pressures and rising taxes continue to bite, the Treasury might find demand for NatWest shares is not quite as robust as it might hope.”


Source: Investment Association

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