I was speaking to a fellow investor over the Christmas break about how they had positioned their portfolio for 2021 and the challenges in finding growth in the UK stock market. In today’s article, I’m going to recap on some of our conversation points about the challenges facing the Financial Time Stock Exchange indices (FTSE 100/250/350/AIM).
It’s a fairly well known fact that taken over the last 10 years, the FTSE100 (the index comprising the hundred most valuable companies on the London Stock Exchange) has made virtually no progress. In January 2000, the FTSE was valued at around 6,600 points and opened 2021 at 6,460. Over the last twenty years it has fallen as low as 3491 in March 2003 and been as high as 7,700 in May 2018.
By comparison, the Nikkei 225 (the 225 high valued companies on the Tokyo Stock Exchange) sat at about 18,900 in January 2000 and opened January 2021 at over 27,400 and the NASDAQ Composite (almost all stocks listed in America) has gone from 3,800 to 12,880 over the same period.
If you look at the FTSE350 the story is slightly better, opening January 2000 at about 3,100 and January 2021 at about 3,697, but annualised growth of about 1% is pretty lacklustre for what is supposed to be one of the world’s leading economies. This lack of UK stock market growth is going to be increasingly problematic for the new breed of ’passive’ investors that are being funneled into index trackers and mutual funds and relying on these to generate growth for their financial futures.
It doesn’t take a genius to see that the problem is clearly in the difference in the companies comprising the UK stock market and those of their overseas competitors. Over the last fifty years, the most valuable UK companies have been oil & gas giants such as BP and Shell, banks such as Lloyds, Barclays and Standard Chartered, insurance and pension providers such as Prudential and Aviva and housebuilders such as Redrow and Persimmon.
Over the last twenty years, these companies have nearly all hit colossal structural challenges – oil peaked at $140 dollars a barrel in 2008 and currently sits at around $50. Interest rates have been in long-term decline, peaking at 17% in 1980 and currently sitting at just 0.10%, depressing bank’s margins and causing significant challenges to insurers and pension providers who relied on the yield from government bonds which regulators forced them to buy and hold as ‘safe’ assets.
Compared to Japan and America, our companies are based on an economy that’s 50 years out of date; when I think of products I want more of, they’re not credit cards and petrol for my car – they’re computers and interesting foods. My generation has been shown over and over again that banks are looking out for their shareholders at the expense of customers. This isn’t to say I’m dissatisfied with my bank; just that I don’t want to give them a penny more in interest charges than I absolutely have to. I can’t think of a single person that wants to spend money with their bank or pension provider. If anything, we’re all desperately trying to spend as little as possible with them.
Companies such as Royal Mail, British Telecom and Marks & Spencer were once upon a time the envy of the world and key drivers of UK stock market growth but no company can dominate forever. Compare these brand names with the likes of Apple or Samsung whose customers seem desperate to hand over as much money as physically possible to get the latest gadgets as quickly as possible. Or consider healthcare companies; if 2020 taught us anything it’s that our health is perhaps the most valuable commodity we have – I’d happily spend £100 today to get a working vaccine, if not £1,000. There’s almost nothing that would stop me wanting the vaccine and happily paying for it.
But these companies are not the companies that up the UK indexes – instead, we seem to have an overhang of aging, ailing brands from the 1900s that are either rooted in technologies long established with diminishing returns, or selling products such as cigarettes that consumers are actively trying to avoid buying.
Of course, it’s not all bad for UK investors (otherwise I’d be quickly looking elsewhere); we have a thriving healthcare and biotechnology sector led by some truly world-class businesses such as GlaxoSmithKline and AstraZeneca. Our IT industry isn’t often compared favourable to America’s, but companies such as Ocado, Telit Communications and ULS Technology all provide potential for growth over the next 20 years.
Small companies often provide greater opportunities. Further down the food chain, the UK has dozens of exciting, innovative companies that truly represent a forward-looking, hopeful vision of providing improved goods and services that will be in high demand by future generations. Our national heritage is to be treasured and built upon but relying upon 100-year old companies laden with outdated IT systems to compete with some of the world’s brightest entrepreneurs is just asking for trouble.
Despite the multitude of very real challenges faced by the UK during the COVID pandemic, our significant expertise in genetic research was made incredibly apparently as our scientists rapidly identified COVID strains and developed vaccines which are now being produced and used by the international community.
In a similar vein to our healthcare expertise, digital gaming appears to be a new international hit, with companies such as Codemasters Group being the target of international acquisitions. Cyber security, water and energy technologies will become increasingly important for future generations, as will distribution and warehousing facilities, healthcare and data mining solutions.
I won’t pretend to have a crystal ball about what will do well in 2021 but I’m fairly certain that the world isn’t suddenly going to return to mailing letters to each other or develop an insatiable urge to take out hundreds of credit cards and use them to buy barrels of oil. The exact nature of the future is difficult to discern – if COVID-19 has taught me anything, it’s that overconfidence in the future is never a good thing but I don’t know a single consumer who actively wants to use more oil, even if they don’t believe in what they call ‘the climate con’ (for the record, I’m quite solidly in favour of more renewable energy and recycling of materials, although not quite to the extent that I’ve been gluing myself to trains in protest). Having said this, I firmly believe that investors seeking to identify companies likely to drive UK stock market growth over the long term is going to be a lot trickier than simply ’buying the index’ in the coming years.
Taking this into account, I’m aiming to position my portfolio to take advantage of future trends and technologies rather than relying on the performance of past but fading glories. If our indexes are to grow, however, we must also take the bold step of keeping British companies British, instead of allowing large overseas competitors to snap them up at a discount. Our nation’s scientists and engineers develop amazing, life changing technologies year after year. Surely it’s no bad thing that our country retains that knowledge and skill rather than constantly selling it off to overseas investors?
Whether Boris Johnson’s government (or future governments) will wake up to the sense of this or not remains to be seen, but as long as we pin our pride to fading jewels from the 20th century and sell off the polished diamonds of the 21st, I fear our stock market (and those investors that passively follow the indexes) will continue to tread water.