Every week, the personal finance section of The Sunday Times carries an interview of a micro-celebrity that asks what they invest in. Some boast that they spend everything they earn; others that they give away their spare money. Many invest in property, many keep their savings in cash and some advocate gold or bitcoin but none, ever, say they invest in equities.
Investing in shares, it seems, is not just anathema to politicians and regulators in the UK but is regarded as irredeemably vulgar by opinion formers and, therefore, by much of the population. This was certainly not the case in the heyday of privatisation, which encouraged wider public participation first in the UK stock market, then internationally. The negative consequences for British companies, the economy, investment, pensions and savings are now causing anguish, but there is no likelihood of a change in what has become a deeply ingrained cultural aversion to equities.
Last November, it seemed that the tide was turning, with a monthly inflow into UK equity funds after 41 consecutive months of outflows. But outflows soon resumed while pension funds and insurance companies show no signs of tip-toeing back in: 2024 was the ninth consecutive year of outflows and 2025 will probably be the tenth. Yet the FTSE All-Share index has nearly doubled in the last nine years for an annualised return of 7.7%. This is considerably less than the return from US equities but much better than that of property, cash or bonds.
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In the year to date, UK equities have returned 6.6%, behind Germany (15.7%) and the rest of Europe but ahead of the US (6.2%). This is not surprising as the US market is priced on a demanding 22 times forward earnings. “A go-global strategy has outperformed the stay-home alternative,” says leading strategist Ed Yardeni of Yardeni Research. But he still advocates overweighting US stocks: “US corporate earnings continue to outpace that of the world ex-US” – as they have since 2009.
The S&P 500’s fourth-quarter earnings rose 13.3% year on year, an increase that doubled expectations. European earnings growth was also better than expected, but up only 1%. Annual growth in the US for the next three quarters is forecast to be 9.8%, 11.9% and 12.6%. But if Trump succeeds in cutting corporation tax from 21% to 15%, up to another 7.6% of earnings growth will be in the pipeline.
Trump’s tariff strategy is working
But what, wail the pessimists, about the consequences of Trump’s proposed tariffs? Won’t they cause stagflation in the US and even a global recession? Some cite the Smoot-Hawley tariffs of 1930 as the reason why the Wall Street crash turned into a global depression. But monetary economists argue that a more important factor was a collapse in monetary growth, associated with banking collapses and currencies being rigidly tied to the gold standard.
Trump appears to be using tariffs to persuade its neighbours to control cross-border migration, to halt fentanyl smuggling into the US and to encourage Europe to pay for its own defence, a strategy that appears to be working. He is also keen to further encourage the reshoring of manufacturing to the US and maintain domestic production of strategically important products, such as steel. Only around 1% of Chinese steel production is estimated to be profitable; China seems to be using the “mercantilist” policy of predatory pricing to drive competitors out of business – hardly what free trade is supposed to be about.
The Eeyore crowd also thinks it inevitable that the “Magnificent Seven” will trip up, bringing the S&P 500 crashing to earth and the US’s global outperformance to an end. These seven saw 26.6% earnings growth year on year in the fourth quarter. They were responsible for more than half of the S&P 500’s gains in 2024; however, they now account for one third of the S&P 500 index, which is probably unsustainable. Still, behind them are another seven – including perhaps Netflix, Palantir, Shopify, Cadence Design, Salesforce and Mercado Libre – and behind them another seven.
In Britain, the corporate news has been good, but the economic news less so. The near-5% stake in BP bought by Elliott promises to give BP a much-needed shake-up, but that process was probably already underway. Commentators breathed a sigh of relief that the economy marginally expanded in the final quarter of 2024 (though not on a per-capita basis) but the mystical faith invested in official statistics by economists and commentators is unjustified.
Preliminary data is highly prone to subsequent revision, especially that for GDP, and the collection of data has become increasingly difficult with so much activity now online. There are “lies, damned lies and statistics”, said Mark Twain. In addition, the Office for National Statistics (ONS) is in well-publicised crisis. The Resolution Foundation claims that one million workers are missing from official employment figures because of major failures at the ONS.
The good news, therefore, is that the economy is performing better than is appreciated; the bad news is that an increasing amount of the economy is probably unrecorded and untaxed, not least thanks to the growth of the gig economy. Disappointing tax receipts are a growing problem for the government.
The prevailing pessimism in the UK is holding back the economy as well as equities. “The growth outcomes here are entirely consistent with our risk appetite,” said John Flint, former CEO of HSBC. In business, the culture of risk aversion is heavily affected by the policies of successive governments. In investment, it has been holding back investors who, year after year, are losing out on readily available returns. The time to be wary of stocks is when risk aversion disappears, not when it is pervasive.
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