HAMISH MCRAE: Can’t pension funds back Britain?

This has to be one of the most unloved bull markets of all time. Last week, the FTSE 100 index moved solidly above 8,000 before falling back.

But every time he scrambles up a little, something comes along and hits him on the head. The index is up about 17 percent from last October’s low — okay, that’s not technically a bull market until it’s 20 percent higher — and it’s one of the rare asset groups to offer real value.

The dividend yield, even after the recent increase, is still around 3.6 percent. That’s about the middle of the range over the past 20 years, compared to 2 percent for the Dow Jones and 1.6 percent for the S&P 500. Still, most professional investors are wary. Why?

Well, part of the answer is that the UK remains unfashionable among the investment elite, for reasons we all know. Part is that the Footsie is heavily weighted with “old” industries like mining, banking, insurance and so on, rather than “new” high-tech industries. But I think more importantly, British pension funds and insurance companies do not invest in British companies. A generation ago they owned half of the UK listed market.

Now, according to the most recent ONS figures, pension funds will hold only 1.8 percent of the market before the end of 2020 and insurers 2.5 percent. Pension funds have been forced into government bonds and other fixed-income securities by regulators and lower equity returns following Gordon Brown’s controversial 1997 tax attack on dividends.

The switch to gilts worked satisfactorily as long-term interest rates fell and gilt prices (which move inversely to yields) rose. But the collapse in bond prices last year was a catastrophe for many pension funds, including the largest, the Universities Superannuation Scheme. As we reported last week, it has lost more than a fifth of its total value in the nine months to the end of September.

One consequence of British institutions avoiding British companies is that foreign holders own 56 percent of UK-listed shares. British individuals, that’s us, own only 12 percent. But at least we’re not as down on UK plc as the pros are, and I’m pleased to say we’ve been rewarded for our support over the past few weeks.

I think this last point – that our market is dominated by foreigners – goes a long way to explaining the oddities of the past few weeks, where some US-specific event unrelated to the London market is driving up stock prices or hammers.

America accounts for about 60 percent of global stock valuation, and stock prices there are in a tug of war between those who follow US consumers and those who follow the Federal Reserve. Consumers are still spending money, or at least in aggregate, because there are serious vulnerabilities, and as they continue to do so, they support corporate earnings. There is a technical slowdown and many job losses, but retail sales are holding up. In January they rose by the largest amount in two years.

The Fed, on the other hand, is expected to tighten further. It’s frustrating that every time a Fed governor makes a comment, stocks here and in the US jump one way or the other. But that’s the world we live in.

It’s especially frustrating because monetary conditions in the US are very different from here. In short, in America the main driver of inflation is excessive domestic demand, while in the UK it is mainly imported fuel and food prices. We both have historically high inflation, but while higher interest rates may be the right policy there, they’re probably the wrong one here. (Inflation in the US was way ahead of ours last summer; now we’re ahead of them.)

So what happens next here will depend in part on this battle between the Fed and US consumers. But there are also things UK authorities can do to make investment in the London market more attractive.

We should ask ourselves whether regulations that discourage UK pension funds and insurance companies from investing in domestic companies have actually benefited UK savers.

We also have to ask ourselves whether it is very smart to raise the corporate tax rate to 25% and encourage more companies like AstraZeneca to build their new factory in Ireland, where the tax rate is 12.5%. This is not politics. It’s common sense.

Governments can help to make investing here more attractive.