The U.K. in a Global Context
There are many factors contributing to equity market success or relative failure and some of the most significant are demographics, innovation and state intervention. I would also add equity culture by which I mean a nations tendency to invest for the long term and appreciation of return on capital as being a key driver of stock returns. Of course, quoted companies can easily exceed country boundaries nowadays but most successful businesses are initially nurtured domestically.
Demographics is an important factor, is difficult to alter and has had a significant effect with India being greatly assisted whilst Europe including the UK and Japan being held back. However, some country exchanges have produced good results despite difficult demographics; I would highlight the US, Korea and Sweden. What can the UK learn from these examples?
In all three of these countries but most clearly the US, innovation has been key. This also cannot be quickly or easily addressed but the US experience suggests it can be improved by well-directed government research programmes, working with universities to better bridge the gap between research and commercial development and the availability of venture capital to offset the self-enriching focused, private equity firms.
Governments in Asia have been pro-active in setting longer term industrial strategic plans and at supporting more capitally intensive industries of the future such as semi-conductor manufacturing. Korea is a good example and contrasts with the obsession in the UK and wider Europe in supporting declining industries such as internal combustion driven cars, steel and, until recently, fossil fuel driven power generation.
Sweden, I believe has countered the demographic outgoing tide by an excellent equity culture. This is greatly helped by a number of substantial ‘holding companies’ such as Investor AB controlled by the Wallenberg family. The group holds substantial stakes in a small number of companies and enforces a long-term approach along with de-centralised management structures and a focus on return on capital.
There are some recent signs that the UK Government is starting to embrace some of these ideas with a greater focus on science in both education and research spending. A great opportunity was forsaken through the sale of the country’s best technology company by far; ARM which could have provided the focus for building semi-conductor capabilities. Most UK quoted UK companies lack influential long-term owners; founders seem to want to sell out early or, like James Dyson, remain private. Investment trusts, which have the correct capital structure to perform long-term holding company roles tend to act more like unit trusts.
Whilst we may see some improvement in the next decade, I fear a number of structural issues still need to be addressed.