Sid – forty years ago – we directly hold less shares than we did in his day
Households in different countries have vastly different exposure to public markets. Among our sample of developed economies, the US leads the pack, with 46 per cent of household financial assets held directly in listed equities and investment funds. Across the EU27, the average is 16 per cent.
The Netherlands, birthplace of the modern stock market, does not even manage half the EU average, at just 6 per cent. The reasons include tax policy, financial culture and, above all, pension system design.
When pension entitlements are included, Australia and the Netherlands — both with large funded retirement systems — shoot up the ranking to above 50 per cent of household financial assets. By contrast, countries with more pay-as-you-go pension systems, such as France, Italy and Spain, see much smaller changes.
In the UK, low stock market participation has been a source of periodic hand-wringing. Attempts to foster a shareholding culture have not halted the slide towards historically low levels of direct stock ownership. This becomes an economic policy issue when too much household saving sits in cash and low-yield accounts rather than being channelled towards productive investment.
Policymakers also care because of the wealth effect. When households have a visible stake in market returns, rising valuations can make them feel richer and more willing to spend. The effect is likely stronger for directly held, liquid assets than for locked-up pension wealth, but broad market participation can still help support consumption.
In a big stock market correction, of course, the wealth effect works in reverse.
I do wonder if one of the factors that has led to the decline in the relative attractiveness of equities and related investments has been the fall in dividend yields. In the 1970s and 1980s I seem to recall there was a risk premium offered by equity investments. Now we have the situation where the MSCI World Equity Index generates a dividend yield of 1.52% (30th June) with UK gilt yields over 5% and interest rates on 1 year term accounts over 4%.
This appears to arise from greater attention to potential capital gains on shares determining share prices, most recently evidenced by the attractiveness of SpaceX IPO where the forward discounted dividend yield appeared to be next to nil as well as giving shareholders no governance controls to change the situation. This means that subscribing to the IPO was little more than a gambling bet – and indeed one that now appears to have been lost as the “shares” can now be bought at a lower price!
In the US versus Europe comparisons, it is probably the attitude to risk that significantly contributes to the lack of attractiveness of equity investments against cash and bonds with a much greater risk aversion by the average saver in Europe. This was most recently reported on by the BBC article: “Would you choose £50,000 over the chance of £1m?” https://www.bbc.co.uk/news/articles/cn0njd4e2evo
If institutional investors such as pension schemes and particularly asset managers changed their emphasis from the value of assets under management to the annual cash income generated by the investment we might well see a radical shift in attitudes to equity investments in both public and private markets.
Well, you can blame government tax and attitude in the poor record of citizen investment in the London Stock Market. We have a mean Parliament who resent any form of property ownership, viewed only to extract more tax rather than encouraging financial investment in the UK. Government seem to encourage investment from oversea’s ending up with our assets being owned by the non British!