HAMISH MCRAE: Foreigners are making the Footsie fly

If the global economic outlook is so dire, why on earth are shares hitting new highs? 

Or put another way, what would equities be doing if US President Donald Trump eased off his barrage of yet more tariffs, and nearer to home, the UK economy looked as though it might grow a bit instead of stagnating?

It’s one of those times when you have to look at what politicians do, rather than listen to what they say. 

As far as US tariffs are concerned, the markets have become exhausted by the constant chopping and changing of the levels and the timing. So they assume that eventually that some sort of accord will be reached and that global trade will continue with only a few hiccups.

Maybe that is wrong, and on Friday, a bit of the enthusiasm waned both in New York and London.

But both markets, and the DAX index in Frankfurt too, were still within one percentage point of their all-time highs. So greed is still beating fear by a big margin. 

Here in the UK, we have to remember that foreigners own at least 58 per cent of the London market. That’s the latest figure from the Office for National Statistics and was for the end of 2022. 

Boost: The Footsie still offers good value compared with most other markets, and is up by more than 8% this year. The dividend yield is 3.5%, which compares with 1.25%for the S&P 500

Since the proportion was rising then, it is likely to be over 60 per cent now. Remember that roughly three-quarters of FTSE 100 company profits come from overseas, so the fact that our economy has been shrinking for two months doesn’t matter to them. 

What Chancellor Rachel Reeves does about taxes in the autumn doesn’t matter either, because they don’t pay them.

Indeed, what she will say at the Mansion House this Tuesday about pensions, Isas and all that is irrelevant to most holders of UK shares. 

It matters for gilts because there is a completely reasonable fear that the Government can’t get its fiscal deficit under control. 

I didn’t like the way in which the 10-year yield pushed up towards 4.65 per cent on Friday. 

You have to ask the brutal question: why does the UK have to pay more to finance its national debt than any other major developed economy in the world? The answer, I’m afraid, is that international investors don’t trust this Government.

But that doesn’t matter to foreign holders of FTSE 100 stocks. The Footsie offers good value compared with most other markets. It is up by more than 8 per cent this year. 

The dividend yield is 3.5 per cent, which compares with 1.25 per cent for the S&P 500, and while dividend growth has stalled, a wave of share buy-backs have helped to underpin their market values.

So what’s next? I think the coming weeks will be volatile for equities. There is a lot that might go wrong that is not being priced into the markets. These are mostly associated with the US and the overly self-confident President. 

They include the possibility that tariffs are the trigger for a US recession. We have no recent experience of what a sharp rise in tariffs does to the economy; all the experience we have is from almost a century ago. 

But put it this way: it must, to some extent, increase prices, and if inflation does rise significantly, people cannot afford to buy so many things.

There is a confidence issue too. For the moment, there is still a lot of money swishing around, a legacy of central banks printing so much of the stuff. 

There’s the cryptocurrency boom, with bitcoin touching yet another all-time high. But confidence can evaporate instantly, as we have seen so many times before. 

You can still believe ‘the sunlit uplands’ story – that despite an awkward summer and autumn, global growth will be solid in 2026 and beyond – but feel worried about what will happen in the next few months.

Back at home, the thing that I do find comforting is that UK equities at least still offer genuine value: a decent dividend yield and some protection against inflation. The Government’s finances are unsustainable. 

That’s not me saying it; it is the Office for Budget Responsibility. As a result, an increasingly desperate Chancellor will increase taxes in the autumn, and our economy will continue to stagnate. 

But look at the UK from outside, and our shares are a pretty good proposition. That is why the Footsie hit its all-time high last week.

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