Could UK equities become fashionable again?

US equities rise, the FTSE “paddles sideways”, to quote AJ Bell Investment Director Russ Mould. This may seem an unfair characterisation to some, but it is a reputation that UK equities are struggling to shake off – and one that the new UK government seems determined to overhaul.

At the time of writing, the FTSE 100 is trading only 24% higher than it did in January 2000. By contrast, the S&P 500, seen as the best gauge of large cap US equities, has grown 307% in the same period.

Considering how easy it is for investors to get exposure to other markets, it may seem like a struggle to make the case for the attractiveness of the UK.

For Ian McCrombie, manager of Baillie Gifford’s UK growth trust, the case is that UK equities have good growth potential and are discounted compared to other markets. The trust has sees more potential in the FTSE 250 and AIM than in the FTSE 100 itself.

He highlights companies such as car selling platform Autotrader, engineering company Renishaw Genus, greeting card company Moonpig and IT company Softcat. The trust has a stake in one unlisted business, a pre-revenue automated driving company called Wayve.

While there may be solid performers, it is hard to deny that the FTSE lacks the high-growth firms that are listed in the US, such as NVIDIA, Amazon and Microsoft.

Encouraging more firms to list in the UK and addressing the sluggish performance of the UK’s flagship stock index is clearly a priority of the government, with Chancellor of the Exchequer Rachel Reeves using her recent Mansion House speech to laud the financial services sector as a key driver of UK growth.

Particularly welcome to finance will be promises to roll back some of the regulation of the industry that was introduced in the wake of the 2008 crash, although Reeves did not announce concrete measures.

The Chancellor also announced plans to unlock more investment from UK pension savers into the UK by encouraging them to consolidate into “megafunds”, noting explicitly that larger foreign pension funds are often the key investors in UK assets (Thames Water, for example, is 31% owned by a Canadian fund). At the same time, plans to address the advice-guidance boundary could help open up financial advice to more retirees.

The government is also keen to boost the ecosystem for investment into privately owned companies, with plans to introduce an exchange that will allow trading of shares in privately owned companies, providing an intermediate step to IPOs.

While these reforms might help, the UK’s economic malaise is deepset, with preliminary data for Q3 showing that the UK’s GDP grew by a weak 0.1% and new figures showing inflation remained above target in October at 2.3%.

Some bodies have accused the government of exacerbating the UK’s economic woes rather than solving them. Figures from Calastone, which tracks inflows and outflows of equity funds, showed net outflows from UK equity-focused funds of more than £600 million in September, as investors sold out of assets to avoid capital gains tax increases.

Edward Glyn, head of global markets at Calastone, said that the government’s “rather pessimistic commentary about the UK economy appears to have put a stop to the nascent revival in interest in domestic equities that we first detected in trading data in July. UK-focused funds seem to be off the menu for investors for the time-being.”

The British Chambers of Commerce said that business confidence had fallen as a result of tax and employment policy, including the rise in employer national insurance contributions and the national living wage announced in the budget. Figures from S&P Global suggest that consumer confidence also fell in November.

In other words, whatever the end results of the government’s reforms, investing in the UK may still be in need of a rebrand.