Britain has shot itself in the FTSE
The FTSE 100 has just turned 40. That’s an important milestone. Does it mark the point at which life begins or the moment when the summit has been crested and the view is resolutely downhill?
Much of the recent commentary about the UK equity market has certainly focused on decrepitude. The consensus appears to be that the Footsie has become somewhat gout-ridden and arthritic. That’s an understandable viewpoint, but a little unfair.
If anything, the pessimism intensified last year. By far the biggest blow was the decision of British chip designer Arm to float on Nasdaq in September. But a number of other companies – including the building materials business CRH and packaging outfit Smurfit Kappa – also dropped their London listing.
And the exodus isn’t over yet. Tui, Europe’s largest travel company, told its shareholders last week that there are “clear advantages” to abandoning the London Stock Exchange for pastures new.
Top of that list would be a valuation bump. The FTSE 100 trades at a slight discount to global equity benchmarks and a sizeable one to the S&P 500 in the US.
This apparently chronic malaise has prompted much hand-wringing and soul-searching. I’ve frankly lost count of the number of reviews there have been into the UK’s listing rules.
Another big report on the “capital markets of tomorrow”, this one authored by former Legal & General supremo Sir Nigel Wilson (who definitely knows his onions), is due to land in the coming months.
But, to date, much of what’s been proposed and even implemented is marginal at best.
In December 2022, the Government introduced the Edinburgh Reforms, designed to make the UK “the most innovative and competitive global financial centre”. Last month, the Treasury Select Committee branded them a “damp squib”, which had had little impact on the economy.
The trick amid all this sound and fury is to figure out which of the London market’s issues are structural, which are cyclical and, most importantly, which are solvable.
Fundamental to this process is the realisation that, when Robert Maxwell took a long walk off a short deck near the Canary Islands in 1991, the media mogul dragged the UK’s equity investment culture into the deep behind him.
Shortly after the tycoon’s mysterious death it emerged that he’d been dipping into the Mirror group’s pension scheme. The subsequent backlash should be a case study in the unintended consequences of rewriting the rulebook in response to one bad apple (who, had he lived, would very likely have fallen foul of existing laws).
New tax and accounting measures – which culminated in the FRS17 accounting standard – resulted in companies having to disclose the surpluses or deficits of their pension schemes in their accounts. Unfortunately these numbers were large, volatile and subject to factors (like interest rates and the vagaries of the stock market) over which the company had little control.
Many quite understandably decided that discretion was the better part of valour and simply closed their final salary schemes, first to new members and then to new accruals. As a result, the biggest pools of risk capital in the UK had to systematically “derisk” and better match their assets to liabilities by switching out of equities and into bonds.
And boy, did they. Collectively, the UK’s defined benefit pension schemes reduced their allocation to UK equities from 48pc in 2000 to just 3pc, according to the Bank of England, in a process that was exacerbated and accelerated by the low interest rate environment.
With 20:20 hindsight it’s now painfully obvious that by implementing FRS17 the UK took careful aim, pulled the trigger and shot itself in the Footsie. That’s not the kind of self-inflicted injury you can walk off in a hurry. Certainly, the latest big idea – launching a British Isa, or Brisa – would be akin to treating a gangrenous wound with a sticking plaster.
This deep malaise is often overlooked. But overlaying it are cyclical issues, which are often exaggerated. The FTSE 100 is stuffed full of miners and banks and therefore shot the lights out when a commodities supercycle combined with an unprecedented financial boom in the 1990s and 2000s.
But that was just dumb luck. Much of the underperformance compared to its peer group since the financial crisis is simply a function of the wheel turning. The general financial commentary has been very poor at treating the two imposters just the same.
There does appear to have been a UK discount in recent years as a result of Brexit, the subsequent devaluation of sterling and international investors deciding they’ll give the UK a pass until the political turmoil dies down – eventually. Maybe we’re approaching that point.
It’s also true the overall market will continue to struggle compared to the US, which is stuffed full of shiny tech firms. But it’s incorrect to say that the UK doesn’t or can’t produce them. There’s a very notable example – RELX. We just never talk about it much.
The company, which used to be called Reed Elsevier, is one of only 25 that has been in the FTSE 100 since day one but is no fuddy-duddy, employing 10,000 technologists and spending roughly £1.3bn a year on IT. It claims to be one of the first companies in the world to have commercialised generative artificial intelligence and has been using machine learning and natural language processing for over a decade.
Americans call their biggest tech firms “the Magnificent Seven”. Why don’t we make much of a fuss over our equivalents?
Maybe because it wasn’t dreamed up in someone’s garage (it was formed by the merger of British and Dutch publishing houses in 1993 – yawn!), it isn’t run by a 20-something whizzkid in a hoodie and it mostly sells its services to other businesses.
But over the last 40 years, its shares have risen more than 6,000pc, compared to the FTSE 100’s 654pc. True, it inhabits a cohort of big London-listed tech firms comprising precisely one member. But, at the very least, RELX gives the lie to generally-held assumptions about the UK market being inimical to tech blue chips.
None of this means the FTSE 100 is in absolutely tip-top shape but the doom-mongering has been overdone. Policymakers are right to look for tweaks that improve competitiveness without sacrificing standards. However, they also need to be realistic about the extent of any transformation this is likely to bring about.
