19 October 2015

Bring back the shareholder economy


Sad news: popular capitalism has failed. At least, that part of it that was about popular shareholding has failed. The proportion of shares in British business owned by retail investors (that is, ‘ordinary people’) has been falling for years and is now close to an all-time low. And who can blame those retail investors? The UK stockmarket has produced no real return since 1999. Just about any other investment you can think of has done better than UK shares. A classic car, a Walthamstow bedsit, an electric guitar – all have done better, a lot better. And the people responsible for undermining the shareholder economy are the people you elected.

Could things be different? Should they be different? Let’s ask Sid.

Readers of a certain age will remember Sid: the never-seen mythical man-in-the-street investor who featured in the 1986 advertising campaign to sell the privatised shares of British Gas to the British public. The “Tell Sid” campaign was sharply irritating, vaguely condescending, and extremely successful. It did exactly what it said on the tin and managed to persuade huge numbers of people who had never before owned shares to pile in and buy the energy company’s equity. That allegedly impossible thing – getting sturdy, sceptical Brits to take an interest in the ownership of business, and put their money where their interest was – had been achieved. Stuff that in your pipe and smoke it, Mr Benn.

And it made sense. Sid did very well. In fact anyone who put money into a representative FTSE 100 portfolio did very well. In the 15 years after 1986 the FTSE 100 went up by a factor of about five. British Gas shares did even better (in fact on average the shares of privatised industries did about twice as well as the average FTSE 100 company). Rising share prices boosted popular capitalism, and popular capitalism boosted share prices. Then, at the end of the nineties, it all went wrong. And it has stayed wrong.

Sid did well, but 1999 must have been about the time he retired to sheltered housing and handed over to Sid junior. If Sid Jnr had celebrated Christmas 1999 by putting £1,000 into the UK stock market (measured by the prices of shares in the 100 biggest companies), then by Christmas last year he would have lost about 10% of his money. And that is after a strong recovery in the FTSE 100 index – if Sid had been unlucky enough to have been forced to cash in six years ago, he would have lost more like half his capital. Fifteen years of investment for a negative return is not much of an advert for popular capitalism.

Stock market boosters will point out that these figures do not include dividends, and it is true that if all stock dividends had been reinvested then the £1,000 would be more like £1,500 at the beginning of this year. Unfortunately, neither of the Sids would ever see that money – unless they lived in a world where investing is cost-free. In the real world management fees, trading costs and inflation would have erased the notional profit. The average wealth management fee is around 3.5% a year, which happens to be roughly the average dividend return in the FTSE 100.

So for the last 15 years it has been nearly impossible to make money as a buy-and-hold long-term UK equity investor. For the quoted corporate economy the era has been one of stagnation punctuated by crashes. This is the main reason why private participation in the stock market has been falling for years – according to the London Stock Exchange less than 12% of shares are now owned by retail investors, down from 20% in 1994 (that includes a small rise in the last two years). Popular share-owning capitalism happened, and then it un-happened.

This is a bad thing. The motivating idea behind this kind of popular capitalism is entirely positive. The division between capital and labour, between capitalist and labourer, casts a stygian shadow on British society. It is a division that fuels ideological struggles that are largely pointless, entrenching positions around the dichotomy of bosses on this side, workers on that. The prospect of a different kind of economy where many individuals share the risk and the profit of business is a good prospect. For one thing, it would help to call business to account for the excesses of its officers. Better still, it would spread consciousness of the little-understood fact that in the end it is private business that foots the bill for everything.

That is the answer to the question ‘should it be different?’ Certainly it should. But can it be different?

The reasons the stock market has been such a terrible place to park your money are many, but the prime suspects are the financial services industry, and governments. The financial sector helped to pump up the bubbles that led to the dotcom crash of 2000 and the credit crash of 2008, which together have robbed the stock market of any performance it might have delivered. But there is no point in bothering about the antics of the City: banks and investment managers have never been interested in long-term business investment, and never will be. Governments, though, have a different bottom line, and should be different.

Everything that governments in the UK and in comparable economies have done in recent years seems to be expressly designed to make share-owning capitalism unattractive. In the finance world they call this ‘financial repression’. Financial repression is the opium of indebted governments everywhere. By keeping interest rates ultra-low, and by making  investors hold government bonds (through things like forcing high capital ratios on banks and other financial companies), governments make sure that however much they borrow it will always be at rock bottom rates, and there will always be more where that came from.

The result is that investors turn away from productive business and towards financial investment. Businesses either have to borrow from banks, or from the capital market, or not borrow at all and let capital expenditure stagnate or fall (which is more or less what has been happening). The stock market goes nowhere, for years on end. And private investors see what is happening and put their money into unproductive assets which are more likely to rise in value.

That is what Sid junior has done. Cashed in his shares 15 years ago, and bought a 1962 Mini Cooper. The Mini doesn’t invent anything or employ anyone or pay any taxes, but it will have made its owner significantly richer than staying in the stock market.

This is the challenge that the governments of the near future have to face: how to make being an owner of UK PLC interesting and profitable again. As the era of zero real interest rates and cost-free government borrowing comes to an end, policymakers will have to work out how to undo financial repression and get the share economy working again, without blowing up the real economy. If they don’t meet the challenge then Sid will stay just as he was in those eighties adverts: invisible.

RIchard Walker is a journalist and advisor to financial companies.