Foreign investors are flocking to London’s stock market – this is why

Overseas investors now hold a record high 57.7pc of the UK stock market, while the proportion of domestic shares held by UK individuals fell to just 10.8pc.

UK equities have been unloved for some time now with institutional and private investors pulling money out of the domestic market.

Jason Hollands, managing director at stockbroker Bestinvest, says: “It’s no secret that ownership of the UK stock market by British insurance and pension funds has plummeted dramatically.

“There are myriad reasons for this shift, including Gordon Brown’s ill-fated decision to scrap the tax relief that pension funds used to receive on UK dividends, the closure of defined benefit pension schemes which has seen them move heavily into bonds, and a general shift towards global equity investing. 

“Private investors have also been shunning the UK market, spooked by relentlessly pessimistic economic forecasts and preferring the allure of the US market where mega-cap growth companies have soared to lofty valuations driving stellar returns.”

Indeed, month after month the Investment Association, a trade body, reports that money is pouring out of UK companies.

The latest figures showed UK All Companies was the worst-selling sector in September, with £884m pulled from UK funds.

Alison Savas, investment director of Antipodes Partners, highlights that while the outlook appears gloomy, opportunities await investors. 

She says: “The UK’s outlook has seldom appeared gloomier. Taxes are at their highest level since the Second World War, sticky goods inflation has spooked the market, and the UK appears to have sunk into a trough of low growth and relatively high inflation.”

She points to the flatlined economy in the three months to the end of September and the Bank of England’s anticipated zero growth in 2024. 

“Further contributing to negative perceptions is [that] the country is experiencing unprecedented political instability following Brexit, with four prime ministers in the past four years. 

“Yet this negative investor sentiment has created value opportunities. Many UK listed stocks are now undervalued relative to their growth profile and outlook.”

Savas says that internal analysis suggests inflation is likely to fall much faster than the market anticipates, and that ebbing import costs – helped by falling prices in China, a major trade partner – are pointing to a softening in goods inflation.  

“All this and more should encourage the market to become more positive about economic prospects.”

Alexandra Jackson, manager of the £48m Rathbone UK Opportunities fund, suggests it’s reassuring that overseas investors are snapping up UK shares, despite poor relative market performance and inflation troubles. 

She says: “Investors overseas are taking advantage of some excellent opportunities in the UK market, particularly since it is currently cheap relative to peers.

“Valuations in UK equities remain compelling, trading on a price-to-earnings ratio of barely over 10 times, certainly better than the US where valuations remain stretched at around 19 times, while also producing an attractive level of income.

“Coupled with strong fundamentals of many excellent businesses, investors backing the UK are putting into action a key strategy of investing – to buy well-priced stocks to benefit from an uplift when share prices climb.”

Jackson says there is a particularly good value to be found among smaller companies. She said that in October the FTSE 250 became cheaper than the FTSE100 – something that’s only happened three times in the last 20 years.

“We are all bemoaning the state of the market now, but we have now reached peak interest rates and inflation is falling. Smaller companies benefit from pressure being off [their] debt – and earnings. History tells us that when the small cap market turns, it happens very quickly – blink and you’ll miss it.”

This makes the UK an attractive hunting ground for smaller companies, where the rebound potential is clear.  

Investors in UK smaller companies could also be in line for a boost if takeovers start increasing, investors say.

Jackson adds: “Low valuations in the UK, more stable interest rates and the wall of money in the private equity world looking for a home means we expect a strong pick-up in mergers and acquisitions in 2024.”

It’s not just UK fund managers who are gung-ho about British companies. Some global fund managers are topping up on UK holdings. 

Ben Peters, manager of the £1.7bn Evenlode Global Income fund, said: “We’ve been decreasing our US exposure and investing in this side of the pond in the UK – and Europe. 

“More recently, prices have become attractive in the UK market, so we’ve increased the weighting and it’s about 23pc of the portfolio now.”

While many experts are reasonably bullish about the UK markets, there’s no way of knowing what curve balls might come along and investors are exposed to the unknown.

Ready to back Britain: here’s what big investors are buying

Emma Wall, head of investment analysis and research at Hargreaves Lansdown, says: “There are some great companies in the domestic market being unfairly discounted.

“While volatility is likely to continue through 2024, on a long-term view this could be a great opportunity to pick up cheap stocks with international revenues, attractive dividends, good dividend cover and robust balance sheets.”

If you want to back companies on home soil and prefer to do your own stock picking, you could plump for some of the shares exciting fund managers at the moment. 

Ben Peters favours multinational UK businesses including Diageo, a recent addition to the portfolio. 

Globally he sees strong demand drivers for spirits in the long term. Despite some potential short-term challenges, he’s still adding to his holding. Diageo’s share price is down 23pc this year.

Peters also likes data analytics firm Experian, which is up 8pc.

For those who want to back stock market minnows, Amanda Yeaman, investment director of UK smaller companies at abrdn, is a fan of Bytes – a software reseller.

She says: “It offers a way for investors to gain exposure to Microsoft, cyber security and other software vendors which have good structural growth and will benefit from AI. 

“The business has continued to execute well and we have seen upgrades to earnings on strong demand across both the corporate and public sector. Strong structural drivers suggest good growth opportunities for years to come with the group well-placed to capitalise.”

Bytes’s share price is up 40pc this year.

Jackson likes Ashtead Technology, which provides equipment and services for the global offshore energy and renewables market. Its share price is up by an impressive 90pc this year.

She also has high hopes for mobile payments company Boku – a stock she has recently added to her fund. 

Boku, which recently signed deals with Amazon and Netflix, allows users to purchase products and services by adding to their mobile bill. Its share price is up 3pc this year.

Rob Burgeman, investment manager at wealth manager RBC Brewin Dolphin, picked out Relx, formed from the merger of Reed International and Dutch company Elsevier. 

The company, now based in London, provides information-based analytics and decision tools for professional and business customers globally. Its share price is up 33pc this year.

Five funds if you want exposure to British stocks

If you are not confident picking individual London-listed companies, you could invest in a fund that is backing a British turnaround.

Hollands recommends Fidelity Special Situations. The fund’s top 10 holdings include financial services firm Aviva and tobacco firm Imperial Brands. Over five years the fund has returned 26pc.

He also likes Temple Bar Investment Trust where top 10 holdings include oil giant Shell and ITV. Over five years the fund has lost 2pc.

For income investors looking for UK companies paying dividends, Emma Wall tips Artemis Income for being managed by “one of the best UK equity income teams in the industry with a strong track record of adding to outperformance through stock selection”. 

The fund’s top 10 holdings include retailer Next and London Stock Exchange Group, and it has returned 36pc over the past five years.

Rob Burgeman, investment manager at wealth manager RBC Brewin Dolphin, likes the Gresham House UK Multi Cap Income fund which has holdings in the largest companies in the UK – including 3i Group and GlaxoSmithKilne – as well as smaller companies within the portfolio.

In this way, some of the volatility is removed, he claims, while there is the potential to benefit from the entrepreneurial spirit in the UK economy. Over five years the fund has returned 47pc.

For exposure to smaller companies Wall tips Amati UK Listed Smaller Companies. The fund’s top 10 holdings include mobile telecoms business Gamma Communications, and Ashtead Technology – both listed on the Aim, London’s junior market. Over five years the fund is down 2pc.

Are you snapping up bargain British stocks? Let us know in the comments below or email money@telegraph.co.uk