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After a long hiatus, optimism is coming back to Britain’s financial markets. Pound sterling has been the best-performing major developed market currency this year. Bullish positions on sterling have also broken records going back to the late 1980s. Equities are showing promise too. Institutional investors are switching back to being net buyers of UK stocks. To top it off, listing activity may be reviving. Vivendi, a French media conglomerate, announced plans this week to list its TV business Canal+ on the London Stock Exchange. Shein, a Chinese fast-fashion company, is expected to follow.
What is driving the rosier outlook? First, the UK is benefiting from a stability dividend. The Labour government won a commanding majority in the July 4 election. It has also been at pains to promise a responsible approach to public finances, in an effort to avoid a repeat of the September 2022 “mini budget” under then Prime Minister Liz Truss, which spooked bond investors. The calm contrasts with a tight election race in America. Even if US markets remain unparalleled, the prospect of economic disruption under a second Donald Trump presidency is unsettling. France and Germany meanwhile face unstable coalitions. This makes Britain a safer bet for investors.
Second, market fundamentals are in the UK’s favour. Years of uncertainty battered the country’s equities, but its stocks now look undervalued and a decent buying opportunity. Indeed, forward price to earnings ratios remain below other major markets. The previous Conservative government also helped stabilise the economy, and investors are now betting that the Bank of England will not make aggressive rate cuts this year. This raises demand for sterling assets.
These factors are enough to draw funds into the UK right now, but they may not be sufficient for them to stay. Political and economic conditions are in flux, and investors can rapidly adapt their portfolios. That is why Britain needs to build on its moment in the sun and convince investors that it can deliver solid returns over the long term as well.
The first step is to unshackle more sources of finance. Investment returns are much easier to juice when there is scale. That means accelerating efforts to liberalise Britain’s collective £2tn pension pot arsenal for wider investments, partly through consolidation. Investment incentives, such as lowering the 0.5 per cent stamp duty on shares, which is higher than in peer nations, would help. Plans to raise more tax revenue from private equity firms also need to be calibrated so they do not push funds abroad. And, as the UK’s new growth minister told the FT this week, foreign investors could do with more help in navigating bureaucratic procedures, which often scare them off.
Next, to foster attractive investment opportunities, the government needs to remove barriers to business growth and infrastructure projects. Labour has made a decent start here. Changes to listings rules, which were kick-started under the previous government and are due to come into force on Monday, should support fundraising for higher-growth and founder-led companies. Further plans to streamline regulations for listings and investors are important.
The government’s planning reforms should support construction, energy and tech businesses, assuming building picks up. But long-term investors will also want to see progress on the government’s broader industrial strategy, including efforts to reduce skill shortages and boost trade links.
Signs of rising investor interest mark a welcome turnaround for Britain, but it is coming off a low base. It is also likely that the country’s shift to calmer politics was mostly expected anyway — indeed the FTSE 100 has actually fallen around 4 per cent since May. The government has work to do. Britain has whetted investors’ appetite, it must now satisfy it.