Get People Owning Shares Again....

In Money Week this week, I've been discussing why the government should be trying to get people owning shares again. Here's a taster....


Who owns the UK?
According to the latest figures, it isn’t you and me. It isn’t even the big insurance and pension funds, although they have a far larger slice of it than ordinary individuals. Increasingly, it is foreign institutions.
That matters far more than most people realise.
In the 1980s, the Conservative government of Mrs Thatcher campaigned for wider share ownership. It is time some of those ideas were revived, because who owns the UK is likely to be even more relevant for the 2010s than it was for the 1980s. One opportunity for a new Tory government, if it wins the election this year, will be to get ordinary people buying shares again, both through restoring the tax breaks on equities, and by using the privatisation of the banking system to distribute shares more widely.
The Office for National Statistics last week published data that showed the ownership of British quoted companies has changed significantly in the last few years. Individuals now own just 10% of the shares quoted on the London market, down from 13% in 2006, and from 54% in 1963. That is an all-time low.
Meanwhile, the proportion held by foreigners has risen dramatically. Foreign investors now account for 42% of London-listed shares, compared with 28% back in 1997. Insurance companies account for 13%, whilst ‘other financial institutions’ (mainly hedge funds) account for 10%. The balance is made up of unit trusts, charities, and, rather ominously, the government, which now owns 1% (mainly Royal Bank of Scotland – hardly the basket you’d want all your eggs in).
It’s true that individual share ownership has been on a steady downward trend ever since the figures first started to be published in the 1960s. In part, that reflected the rise of the big unit trust and pension companies, which owned shares collectively. In the 1980s and early 1990s, however, the percentage at least held steady at around 20%. But under this government, it has halved again. On current trends, it will expire completely in another decade, perhaps when some elderly pensioner in Eastbourne finally decides to sell those British Telecom shares they bought in the 1980s.
Of course, its understandable that most investors are fed up with buying shares. It has been a miserable decade for equity investors. Unless your timing is exceptionally good, you’d have lost money. And the tax breaks on Individual Savings Accounts have been steadily whittled away, making share ownership gradually less attractive. Instead people piled into property, or just spent all their money.
But just as we did in the 1980s, we should be trying to get more people to own shares. Here’s why.
First, it gives people a stake in the system. As Mrs Thatcher saw clearly, people will only support a free market, capitalist economy if they feel they are a part of it. Over the last decade, the government has steadily loaded more and more taxes onto business, either directly through higher payroll charges, or else indirectly, through regulations that grant more and more rights to workers. If people don’t have any stake in business as shareholders, then they will probably support that – after all, it’s better if someone else pays the taxes rather than you. But if they can see every new corporate tax lowering the price of the shares in their portfolio, and reducing their dividend income, they are a lot less likely to sympathise.
Next, all the evidence suggests that individual shareholders are far more willing to support companies in the long term. Foreign investors will move into and out of the UK depending on the shape of a big chart in a Power Point presentation in Boston or Beijing. The hedge funds don’t hold onto a share for more than a few weeks. Private investors tend to buy and hold, not because they are intrinsically patient, but because they don’t have the time or the interest to constantly shuffle their portfolio around. Whilst nobody wants to see restriction on takeover deals, there can be no question that companies do best when they have long-term, supportive, patient shareholders, who will allow managers to focus on the long-term, without having to worry to much about next-quarter’s results, or designing some fancy piece of financial engineering that allows it to boost its share price for a few weeks.
Finally, British industry is going to desperately need more capital over the coming decade. After a decade in which it was puffed up with debt, and a tidal wave of public spending, the UK is going to have to develop new industries to get itself growing again. Capital will be in short supply. Savings are low, and the government will be borrowing most of the money that is available. Private shareholders will be one of the few sources of fresh capital for the new, entrepreneurial companies the UK needs to encourage.
The government can, in reality, do plenty to encourage people to own shares again.
It can restore the tax advantages. In the last decades, the tax breaks on an ISA have been sliced away so that they are virtually meaningless for standard rate tax-payers. Why not offer tax relief on contributions, just like a pension, and raise the annual contribution limit to £15,000. That would give people a powerful incentive to build up a portfolio of shares, rather than just putting all their money into property. You could go further. Why not make all dividends on shares in UK companies free of income tax – after all, corporation tax has already been paid on the profits that are being distributed.
Next, when the banks are privatised, use it as opportunity to spread share ownership. Selling off the utilities in the 1980s wasn’t just about raising money. It was about changing attitudes towards business. Why not give everyone free shares in RBS? After all, we already paid for them. And then make them free of all taxes if held for five years?
In a globalised economy, dominated by big investment funds, you’ll never get back to the high levels of individual share ownership of the 1960s. But 10% is a shockingly low figure – and if it could be nudged up a few points, it would help fix some of the problems with the UK economy.

Stocks Won't Rise On A Change of Government...

I my Money Week column this week, I've been looking at why stocks won't rise on a change of government. Here's a taster....

The date of the next British election may still not have been decided. Still, one thing is certain. A date has to be set for early June at the latest, with May 6th the most likely day. Within a couple of months, and possibly sooner, the country will be struggling to stay awake during Gordon Brown’s launch of his manifesto, and trying to keep a straight face as Nick Clegg earnestly outlines his plans for government.
Amusement, and no doubt boredom aside, that will pose and interesting question for investors and the markets. If you look at the historical record, it suggests that this is the time to be backing Britain. Sterling traditional does well when the party in power is about to change. And, if you believe that, as the polls suggest, the Conservatives will be forming the next government, that too is a reason to buy: stocks have always done better under Tory administrations than Labour ones.
Not this time, however. In reality, investors should steer clear of the UK until well after the election is over. There is still too much uncertainty over the result. And it isn’t clear the country is ready for the kind of tough medicine it will take to get the economy back on track. Britain will be a buy again one day, but probably not until 2012 at the earliest.
So what does the past tell us is likely to happen this year?
In the past, you’d have made money by buying into British assets ahead of a change of government.
Take a look at sterling.
In the run-up to, and the immediate aftermath, of the two last changes of government, the pound rallied significantly. After falling to a level of 95 on a trade weighted index in 1976, the pound soared to a 130 by 1981. The tight budget restrictions imposed by the IMF, followed by the spending cuts of the incoming Thatcher government, restored the faith of the markets in the pound.
Something similar happened when Tony Blair took office. After falling steadily through during the early 1990s, the pound climbed again in the second half of the decade. It dipped down to 80 on a trade-weighted basis in 1996, but was back above a 100 by the time Blair was getting used to the view from Downing Street. The markets were re-assured by all that talk from Gordon Brown about ‘prudence’ and ‘golden rules’. They turned out to be deluded, but no one knew that then.
How about equities?
Again, the record is encouraging. At the end of 1978, as the country went into an election year, the FTSE All-Share Index stood at 220 (the FTSE, of course, wasn’t invented back then). By the end of 1981 it had risen to 313. Pretty good.
It smiled on Blair as well. The FTSE was just over 5,000 when 1996 ended, and as the country looked forward to the end of 18 years of Conservative rule. Over the next three years, it carried on rising steeply, hitting its all-time high of 6930 in December 1999. What happened next wasn’t so good, but there is little question the change of government was good for stocks.
If a change of government is good for stock, changing to a Tory one should be doubly good. As John Littlewood pointed out in a recent report for the Centre for Policy Studies, shares always do far better under Conservative governments than Labour ones. The market rose by 74% under the 1951-1964 administration, and by 166% under the 1979-1997 government. By contrast, they dropped 7.5% under Clement Atlee, 13% under Harold Wilson in the 1960s, 11% under the Labour Government of the 1970s, and, up until 2009, had dropped 26% under Blair and Brown.
The past, then, suggests that a victory for the Conservative Party in either May or June would be good for both the pound and UK stocks. Maybe it’s time to ditch those euros, and get rid of the Shanghai tracker, and get your money into the FTSE instead?
Well, not quite. True, the four most dangerous words in investment are ‘it’s different this time’. The past doesn’t always repeat itself, but it follows patters more often than we usually think. Those caveats accepted, however, it does actually look different this time around.
Here’s why.
First, the result is by no means a foregone conclusion. The Conservative Party needs to win a huge number of seats to get a stable majority. Any sign of a hung parliament, and the markets are going to wobble dramatically.
Right now, the only thing keeping sterling alive is the prospect of a change of government. No one has any confidence in the willingness of Brown to bring public spending under control. If the election isn’t decisive, the markets will realise that the UK is Greece minus the sunshine. The pound will collapse, and the equity markets with it, amid fears of insolvency.
Next, it is by no means clear that a new Conservative Government will have the clear mandate to deliver the tough medicine the economy needs. The Irish Government has delivered swinging cuts to public spending, slashing wages in the public sector, whilst keeping taxes down. There is very little sign that the public is ready for that in Britain, or that the unions will allow it. A Cameron government, with a slim majority, may face a tough battle with the public sector, with the Labour opposition will be braying that you can just print money instead. Don’t count on it winning that showdown.
Cameron might well be another Edward Heath: a Prime Minister who knows that tough decisions have to be taken, but doesn’t have the public backing to push them through. And how did stocks do under Heath. Not very well, since you ask. Shares fell 11% between 1970 and 1974.
Britain will be a buy again one day. The labour market is a lot more flexible than it was in the 1960s and 1970s. It may well bounce back relatively quickly. But it is not likely to happen until it is clear the new government can get on top of Britain’s deficit. Unlike the past, you don’t want to be buying ahead of an election.

Blank Walks The Plank...

In Money Week, I've been writing about how chief executives are going to start getting a much rougher ride. And about time too....Here's a taster.

Nobody will be sorry to see Sir Victor Blank depart as the chairman of the newly-created Lloyds Banking Group, least of all its shareholders. The rushed merger with HBOS, cobbled together after a drink with Gordon Brown, will surely go down in British corporate history as one of the most spectacular financial catastrophes of all time. The only surprise is that he hung on to his job all the way to May rather than being forced out as soon as the mess he had made of the job became clear.
But Blank will be far from the last FTSE chief forced to walk the plank. Indeed, the next five years look set to be very rough for the pampered executive class. Heads will roll on a scale that would make even the most blood-fevered Jacobin revolutionary feel queasy. Chief executives and chairmen have grown used to hiding behind a booming economy, whilst lining their own pockets with salaries, pensions and bonuses that would make even a backbench MP feel embarrassed.
The far tougher economic conditions of the next five years will sort out the really skilled businessmen from the mere clock-watchers and time-servers.
Indeed, Blank himself is emblematic of the kind of executive who prospered during the great bubble. He was a skilled net-worker: just about everyone in the City will have been to one of the summer cricket matches at his Oxfordshire estate. But there was very little evidence of any real commercial talent. He started his career as a lawyer, becoming a partner in what was then Clifford Turner, before switching to corporate finance and dabbling with mostly non-executive roles. He was chairman of Trinity Mirror for many years, during which the Daily Mirror began its long descent into irrelevance. He was the architect of the merger with the Trinity local newspaper group, another catastrophe for shareholders. But it was at Lloyds that he really got found out.
It is probably a good rule that lawyers shouldn’t be put in charge of banks: another lawyer, Lord Alexander, was the chairman of NatWest for a decade in the 1990s, and that ended up being sold to Royal Bank of Scotland, with results that are now plain for everyone to see. Blank certainly seem to have very little idea what he was wading into when he took control of HBOS last autumn. Lloyds had sensibly avoided the worst excesses of the bubble. But years of careful management were blown in a few days with the £7.7 billion acquisition of HBOS.
A career banker would have been a lot more cautious: there were already plenty of stories circulating about wild and imprudent lending at HBOS. Blank’s naivety, and his lack of hands-on experience of retail banking, were cruelly exposed.
He will have plenty of company of the next few years, however.
This recession will sort out the smart business brains from the public relations men and networkers. In a bubble, all manner of weaknesses can be quietly swept under the carpet. All that is now about to change.
First, the bubble allowed lots of pretty ordinary businesses to look as if they were doing pretty well. Since it burst, we’ve discovered that British Telecom isn’t really a world-beating, science-based company on the cutting edge of technological change. It’s a fairly dull old utility, with some big pension problems. Marks & Spencer turned out not to be a brilliantly re-invented retail concept ready to conquer the world, but a slightly odd combination of an over-priced food chain with an underwear retailer added on (or maybe it’s the other way around). Plenty more chief executives will find the next few years a chastening experience. It wasn’t that hard to push up sales and profits in an economy growing at 3%-plus a year. It is a lot harder in one contracting by 3% a year.
Next, there isn’t going to be much leverage around to pep up performance. During the credit boom, plenty of chief executives borrowed some tricks from the private equity industry. Even if they company wasn’t doing that well, they could spice up returns by calling in some investment bankers and re-engineering the balance sheet. Debt could be pushed up. Properties could be sold off and leased back. With the money, you could raise dividends or launch share buy-back programmes. None of that is going to be possible for the next few years. The cash won’t be there.
On top of that, there isn’t much chance of an M&A boom. A mega-merger allowed companies to promise growth in the future. Even if that didn’t materialise, you could strip out a lot of costs, and grind out higher profits. GlaxoSmithKline has been playing that trick for years. But with the markets in no mood to finance any mega-deals, that won’t be on the table either.
Lastly, investors are about to get a lot more demanding. Capital will be scarce – and the huge borrowing requirements of every major government will suck up much of what money there is available. For much of the last decade, shareholder oversight of big companies has been largely a fiction. Company boards could essentially do whatever they liked. That too is about to change. Companies will have to pay close attention to what their shareholders want. If they don’t, they’ll find themselves quickly voted out of office.
Chief executives have done well out of the boom of the last decade. Million-plus salaries that once provoked headlines have become the norm. Pension packages were lavish. Bonuses were paid out regardless of whether they were any results to justify them. And yet of the British companies in the FTSE, only BP, HSBC, Tesco, Vodafone and RTZ could really be argued to have made much progress as global businesses in the last decade. The rest were just treading water, and that is putting it kindly.
The easy days are over. In the next five years, company directors will have to understand their businesses inside out. They will need to know how to create new products, expand into new markets, and deliver improved returns for shareholders. Otherwise, they’ll soon find themselves keeping Sir Victor Blank company in the ex-Chairman’s club.