When we talk about the stockmarket in the UK, we are probably thinking of the FTSE 100, supposedly a representation of the largest companies in the UK. When we talk about the American stockmarket, we are probably thinking of the S&P 500. I know there are arguments to say that it’s more complicated than that, but I’m talking about what everyday people think, what they hear on the news and how they react.
If you look at the chart above you can see how the FTSE 100 has done over the last five years – it’s represented by the yellow line. That line shows that the value of our 100 largest publicly quoted companies haven’t increased. You’ve got your dividends but in terms of capital gains, investing in these companies has left you with the same nominal wealth and – after inflation – a bit of a loss.
On the other hand, you could – and probably did – invest your money in the American stock market (represented by the S&P 500) and – even after all the shenanigans, you’d have made a 60% profit. I know there are things like currency that come into this, but my point is that the average reader of this blog is asking the question in the title of this blog.
And this isn’t an abstract question. A profitable private sector generates the taxes to pay for the public services we enjoy, keep personal taxes down – improve our standard of living. It looks as if money is simply not flowing into our stock market in sufficient amounts to drive up the valuations of our companies. Why aren’t we as attractive to the rest of the world as the S&P (and other world markets?)
And why do British investors (such as the pension schemes we are invested in) choose to invest overseas and not in home markets. That is a question that Boris Johnson and Rishi Sunak asked last year in their letter to the British Pension Funds that went down like a lead balloon.
The simple answer is that there is no argument for trustees to invest anywhere but where they can get the best return for their members and the sponsors of the schemes they manage. Commercial entities like insurance companies and master trusts have no reasn to hobble their proposition by investing in companies that aren’t doing the business.
Doing the business = productivity
I am at a loss to understand why British companies aren’t doing the business. I’d be interested to hear some answers from people who understand economics.
But I can give one little instance of how important all of this stuff is to our personal finances. If your pension fund invested in global stock markets, only 13% of that investment would find its way to our markets , most of it would be invested in the US , European and emerging markets. And you would have a much bigger pot than if you had been invested in the UK Stock market.
Had my ordinary reader been left to his/her own devices in making the choice, I suspect many would have chosen the first market that came to mind – the FTSE 100.
Fortunately, trustees and insurers and other commercial investors see past the obvious and do the less obvious. And in doing so, they get better returns on our money.
I know this is a massive simplification, but it still needs to be said. For all the moans about costs and charges, unscrupulous investments and outright fraud, most of us have done very well out of the markets this century. That’s down to us trusting the people who manage our money and our investing in defaults.
I don’t know the answer to the question posed in the title of this blog, but the people who invest my savings do. Perhaps the people in Government charged with improving our economic performance, could find answers to this tricky question from the so called fat cats.
You would find Andrew Smithers work on valuations helpful
I would agree that Andrew Smithers work is helpful. There are though some points to make – the FTSE 100 is a very poor measure of the UK economy – it has far too many overseas companies in it. Even the FTSE all-share is not very representative of the UK economy – over the past 30 years it has progressively captured a smaller share of the economy. It has over the past twenty years done marginally better that the FTSE 100 – by price indices 1.6% % pa compound versus 0.8%. You do though gain some insight when comparing the more relevant total return indices – and there over twenty years, we see 5.2% pa compound for the all-share versus 4.5% for the FTSE 100. This suggests that UK companies are over-distributing as dividends and in consequence under-investing in their businesses and with that productivity growth is dampened.
The further reason of course is that throughout this period UK DB pension funds have been selling equity in general and UK equity in particular – Pension funds now hold around 2% of the market down from 32.4% in 1990. That makes what we see to be something of a self-fulfilling prophecy.
The silver lining to all this is that the UK market was just about the best performer in the first six months of this year.